The buyer wants to exclude our deferred revenue liability from the net working capital calculation but wants us to leave the corresponding cash in the business at close. How do we prevent this working capital double-dip during transaction negotiations?

Question

Tyler Smith · Accepted Answer

This is a common buyer maneuver designed to strip cash out of the business at close. If you collected customer cash upfront for services you have not yet delivered, that cash is offset by a deferred revenue liability on your balance sheet. If the buyer excludes this liability from the net working capital target but demands you leave the cash, they are effectively getting paid to perform the future work while you bear the historical acquisition costs. To prevent this double-dip, you must insist that deferred revenue is treated as a working capital liability. Under this structure, the working capital target is adjusted upward to reflect the deferred revenue, and you leave a corresponding amount of cash to cover the future delivery costs. Alternatively, negotiate a purchase price adjustment where you retain the cash associated with the deferred revenue, minus the direct cost to deliver the service. This ensures that the buyer is capitalized to perform the work post-close, while you are fairly compensated for the marketing and sales efforts that secured the customer in the first place. Address this issue early in the letter of intent negotiations to establish a clear and equitable working capital methodology before entering the deep due diligence phase.