The buy-side Quality of Earnings team is claiming our normal customer prepayments should be treated as debt-like items rather than working capital, which directly reduces our cash-free, debt-free purchase price. How do we defend our working capital treatment using our daily operating cycles?

Question

Tyler Smith · Accepted Answer

When a buy-side Quality of Earnings team tries to classify customer prepayments as debt-like items, they are trying to lower your net cash proceeds at close. They argue that because you collected cash before delivering the service, you owe the buyer a corresponding amount of post-close operational fulfillment. If you accept this, the buyer gets to deduct that prepayment dollar-for-dollar from your final purchase price.

To defeat this tactic, you must prove that your prepayments are an ongoing, stable part of your net working capital cycle. Show the auditors your historical operating patterns. If you have consistently run the business with a negative working capital cycle where customers prepay, this is a structural operational advantage, not a liability.

Use your weekly EOS® Scorecard history to prove that this cash collection cycle is highly predictable. Document that these prepayments do not represent an extraordinary liability, but rather standard operating procedure that funds your immediate delivery costs.

Align this with the Income Approach to show that your future cash flows are more reliable because of this upfront collection. By proving that this deferred revenue is a recurring, operational source of capital that keeps your cash conversion cycle short, you can force the buyer to include it in the working capital peg instead of treating it as debt.

Your goal is to show that a buyer does not need to inject new cash on day one to fund delivery, because the system is self-funding. This protects your cash-free, debt-free transaction structure.