The buyer's working capital proposal is classifying our deferred revenue as a debt-like item to be deducted from our purchase price at close. How do we fight this classification and protect our net cash proceeds?

Question

Tyler Smith · Accepted Answer

Buyers frequently try to classify deferred revenue as a debt-like item because they want you to leave cash in the business to cover the future cost of delivering those services. If you accept this classification, it will directly reduce your cash proceeds at closing.

To defend your cash, you must present a detailed analysis of your actual cost of delivery. Deferred revenue is not a dollar-for-dollar debt; it represents future revenue where the cash has been collected upfront. Your true liability is only the direct cost to deliver the service, which is typically much lower than the gross deferred revenue balance.

Use your historical Scorecard data and financial reports to show your true gross margin. Prove to the buyer that your automated workflows and efficient operational processes keep your delivery costs low. By demonstrating a high gross margin, you can argue that only the direct delivery cost, plus a reasonable margin, should be considered a liability.

Negotiating a working capital peg that correctly accounts for your cash cycle is critical. By proving your operational efficiency, you can prevent the buyer from using accounting definitions to claw back your hard-earned cash at the closing table.