The buyer is defining our enterprise value at eight times EBITDA, but in the purchase agreement they are treating our operating vehicle leases and accrued employee bonuses as debt-like deductions while excluding prepaid software licenses from working capital. How do we defend against this purchase price shrinkage?

Question

Tyler Smith · Accepted Answer

Buyers use purchase agreement definitions to reduce cash proceeds at closing. Every dollar recharacterized from working capital into debt or debt-like items reduces the purchase price dollar for dollar. Conversely, stripping current assets like prepaid software from working capital forces you to deliver excess cash to meet the working capital target.

Start with the operating leases. Under current accounting standards, operating lease liabilities sit on the balance sheet, but they are operational contracts that support daily revenue generation, not funded financial debt. If the expense of those leases was already deducted to determine your adjusted EBITDA, deducting the lease liability again as funded debt represents blatant double dipping. Stand firm that operating leases remain in normal operating working capital.

Address accrued employee bonuses using the same logic. If your Quality of Earnings already includes a normalized run-rate deduction for annual bonus expenses within EBITDA, treating accrued bonuses at close as a debt deduction penalizes you twice. Accrued bonuses should remain inside current liabilities within the net working capital calculation.

For prepaid software licenses and vendor retainers, require their inclusion in current assets. These assets provide tangible operational value to the buyer post-closing. Define working capital specifically in the Letter of Intent using an agreed accounting schedule that explicitly categorizes each balance sheet line item as working capital, funded debt, or excluded assets.