The buyer is pushing for a debt-free, cash-free transaction, but we have significant cash tied up in customer deposits for projects we have not started yet. How do we structure the treatment of deferred revenue so we do not end up handing over our own cash to the buyer at closing?

Question

Tyler Smith · Accepted Answer

Buyers expect a debt-free, cash-free transaction, which means you keep your cash and pay off your debt before closing. However, if your business collects cash upfront for projects you have not delivered yet, this cash is classified as deferred revenue. The buyer will argue that this cash must stay in the business to fund the fulfillment costs, effectively forcing you to hand over your cash for free.

To defend your cash, you must negotiate how deferred revenue is treated in the Net Working Capital peg. You have two options. The first is to exclude deferred revenue from the liabilities calculation entirely, allowing you to keep the cash, but this usually results in a purchase price reduction because the buyer must fund the fulfillment.

The second and better option is to perform a double-entry adjustment. The cash stays in the business, but it is dollar-for-dollar offset by a reduction in the Net Working Capital target. Alternatively, you can negotiate a direct credit to the purchase price for the margin portion of the deferred revenue.

Use your EOS strategic planning and Level 10 Meeting to review your open project pipeline and exact cash positions. Clarify this treatment in the letter of intent before you lose your leverage.