The buyer wants a cash-free debt-free transaction but is insisting that our customer pre-payments and deferred revenue should remain in the business post-close without a corresponding increase in the purchase price. How do we defend these customer deposits as working capital to prevent them from pocketing our cash?

Question

Tyler Smith · Accepted Answer

In a typical cash-free debt-free transaction, the seller keeps the cash on hand but must deliver a business with sufficient working capital to operate. Buyers love to argue that deferred revenue representing customer pre-payments for services you have not yet delivered must stay in the company, while also arguing that the associated cash belongs to them. This is double-dipping, and it strips you of your hard-earned liquidity.

To defend your cash, you must link your deferred revenue directly to the operational cost of delivering those services. Create a detailed schedule showing the cash outflow required to fulfill these pre-paid contracts. If you have already paid the sales commissions and set up the automated delivery systems, the actual cost to deliver is far lower than the deferred revenue liability on your balance sheet.

Argue that the deferred revenue should be treated as a working capital item, but with a significant discount applied to reflect your actual cost of fulfillment, not the retail value. Alternatively, negotiate to keep the cash associated with those pre-payments, with a portion placed in an escrow account that is released to the buyer as they perform the services post-close.

Use your operational Scorecard to track fulfillment efficiency and prove that your cost to deliver is highly predictable. By demonstrating that the buyer will inherit a highly automated delivery process with high gross margins, you can easily show that keeping one hundred percent of the pre-payment cash is an unfair windfall for them.