We agreed to a cash-free, debt-free transaction in the LOI, but now the buyer's accountants are arguing that our long-term software licensing agreements and equipment leases should be treated as debt-like items. How do we defend our balance sheet structure during negotiations?

Question

Tyler Smith · Accepted Answer

In a cash-free, debt-free deal, buyers will scour your balance sheet looking for any liability they can classify as debt-like, which directly reduces your cash proceeds at close. Long-term software contracts and operating leases are favorite targets, but you must resist this classification. Start by distinguishing between operating liabilities and financial debt. Software licensing and normal equipment leases are standard operating expenses required to run the business. They are not borrowed money. Because these expenses are already accounted for in your historical profit and loss statements, they are already baked into the EBITDA multiple the buyer is paying. If the buyer subtracts them as debt-like items while also benefiting from the EBITDA those assets generate, they are double-dipping. Use established valuation standards like IVS 105 to argue that these agreements represent ongoing operational requirements of the business, not structured financing. Show that these expenses are recurring and essential to maintaining the cash flows the buyer is acquiring. To protect yourself, make sure your LOI explicitly defines what constitutes debt-like items. Limit the definition strictly to funded bank debt, shareholder loans, and tax liabilities. Any lease or software contract that is critical to daily operations must remain classified as a normal operating expense, ensuring your cash at close remains untouched.