We collect a significant amount of our recurring revenue upfront through annual contracts, but the buyer is demanding that we leave this deferred revenue in the business at close without a corresponding adjustment to the purchase price. How do we structure this in the net working capital peg to protect our cash?

Question

Tyler Smith · Accepted Answer

This is a classic deal structure trap where buyers try to double dip on your recurring revenue model. They want the cash you collected upfront, but they expect you to perform the work post close without receiving any of that cash. To prevent this, you must explicitly negotiate the treatment of deferred revenue during the LOI stage. Do not wait for the final purchase agreement. You should argue that deferred revenue is not a working capital liability in the traditional sense because your cost to deliver the service is only a fraction of the deferred revenue amount. Use your operational data from your weekly Scorecard to show your actual gross margin. Propose a compromise where you leave only the cash required to cover the actual fulfillment cost plus a small buffer, rather than the entire gross amount. Another clean approach is to reduce the net working capital target by the amount of the deferred revenue. Your goal is to prove that because your operations are highly systematized, your delivery costs are predictable and low. This allows you to walk away with the majority of that upfront cash while still handing over a healthy, functioning business.