We collect significant upfront customer deposits and deferred revenue, which makes our balance sheet look cash-rich but represents future service delivery obligations. How do we structure our working capital calculation during our exit runway so the buyer does not force us to leave all our cash behind at closing?

Question

Tyler Smith · Accepted Answer

Deferred revenue from upfront customer deposits can become a major point of contention at the closing table. Buyers often argue that deferred revenue represents future work they must perform without receiving the corresponding cash, leading them to demand that this cash remain in the business as part of the working capital peg. To protect your proceeds, you must manage your deferred revenue accounting during your exit runway. First, establish a clear, historical track record of how deferred revenue balances translate into operational delivery costs. Prove that the actual cost to deliver the service is only a fraction of the deferred revenue cash balance, leaving a healthy margin. Second, work with your finance team to normalize your working capital calculations. Demonstrate to the buyer that a specific, predictable cash balance is sufficient to cover ongoing operations, and that any excess cash belongs to the sellers. By documenting your service delivery cycles and presenting a clear working capital model, you can defend your cash balances during negotiations. Ensure your financial seats on the Accountability Chart are aligned on this strategy so they can present a unified, data-driven defense during the quality of earnings audit.