In preliminary deal terms, the buyer is classifying our accrued paid time off and customer volume rebates as debt-like deductions dollar-for-dollar off enterprise value, rather than ordinary working capital items. How do we fight this classification to preserve our headline purchase price?

Question

Tyler Smith · Accepted Answer

In lower middle market transactions, the boundary between working capital and debt-like items is one of the most contentious battlegrounds. Debt-like deductions reduce your cash at close dollar-for-dollar, whereas working capital items are pooled into the target working capital peg and fluctuate within normal historical operational bounds without immediate enterprise value erosion.

Buyers routinely attempt to extract accrued operational liabilities, such as accrued paid time off, customer volume rebates, and accrued bonuses, out of working capital to lower their effective purchase price. Fight this classification by analyzing historical accounting consistency. If accrued vacation and quarterly customer rebates have always been treated as current operating liabilities in your monthly financial statements, and were fully expensed against the trailing twelve-month EBITDA the buyer used to price the business, removing them is double-dipping.

Establish these definitions firmly in the Letter of Intent before signing exclusivity. Explicitly designate accrued PTO, routine customer incentives, and normal operational accruals as components of Current Liabilities inside the Working Capital definition. Restrict the definition of Indebtedness strictly to funded bank debt, capital leases, third-party promissory notes, and past-due payables outside standard vendor terms. Clear definitions at the term sheet stage prevent the buyer deal team from manufacturing late price adjustments during definitive agreement drafting.