Our software-enabled services business collects annual customer prepayments upfront, creating a large deferred revenue balance. The buyer is insisting on excluding this deferred revenue from the net working capital calculation while keeping the cash. How do we defend our working capital structure to prevent them from taking our cash at close?

Question

Tyler Smith · Accepted Answer

Buyers often try to exclude deferred revenue from the net working capital calculation while demanding that the associated cash remains in the business at close. This is a double-dip tactic that strips your company of its hard-earned liquidity and forces you to fund the post-close fulfillment costs of those prepayments out of your own pocket.

To defend your cash, you must argue that deferred revenue is a working capital liability. Because you have a contractual obligation to perform services in the future, that liability must be offset by the cash you collected.

Propose a structural compromise where the deferred revenue is included in the net working capital peg, but you agree to transfer a portion of the cash to cover the actual direct costs of fulfilling those contracts post-closing. This ensures the buyer has the resources to service the customers without receiving a massive cash windfall at your expense.

Use your company scorecard to present historical data showing your consistent cash conversion cycle. Show the buyer that your recurring prepayments are an operational asset that funds ongoing working capital, not a liability they need to discount.

By preparing this analysis ahead of the Quality of Earnings review, you shut down their attempt to retrade the deal. You protect your cash at close and ensure your net working capital target reflects the true operational reality of your business.