Our company operates on a deferred revenue model, and the buyer wants to treat our deferred revenue balance as a debt-like liability that reduces our purchase price, while also requiring us to leave it in net working capital. How do we prevent this double-counting of deferred revenue in our deal structure?

Question

Tyler Smith · Accepted Answer

This is a common trap for technology and service companies that collect cash upfront. Buyers often argue that deferred revenue represents a future performance obligation that they must fulfill post-closing, so they treat it as a debt-like liability and deduct it directly from your purchase price. At the same time, they want to include it in the net working capital peg, which forces you to leave the corresponding cash in the business to fund those operations.

This is double-counting, and it unfairly penalizes the seller. To defend your valuation, you must negotiate a clear definition of how deferred revenue is handled in the purchase agreement.

Your primary argument is that the cash associated with that deferred revenue has already been collected and is part of the working capital cycle used to fund ongoing operations. If the buyer is receiving a fully funded working capital cycle, they do not get to also discount the purchase price.

Structure the deal so that deferred revenue is treated as a working capital item only, without any purchase price deduction, provided you leave a normalized level of working capital to service those customers. Alternatively, agree to a post-closing adjustment where you transition a portion of the cash specifically tied to the actual, direct marginal cost of fulfilling those services, rather than the full deferred revenue amount which includes your profit margin. Use your weekly Level 10 Meeting™ to ensure your finance team is aligned on these definitions so you do not get blindsided during the working capital reconciliation.