The buyer is proposing a standard cash-free, debt-free deal, but we collect significant upfront customer deposits. How do we prevent the buyer from keeping this deferred cash without giving us credit at close?

Question

Tyler Smith · Accepted Answer

In a standard cash-free, debt-free transaction, the seller keeps the cash and pays off all debt prior to closing. However, if your business model relies on collecting upfront customer deposits or billing for annual contracts in advance, you carry a large deferred revenue liability on your balance sheet. Buyers will argue that since they are taking on the future obligation to deliver services to those customers, they must keep the corresponding cash to fund operations post-closing. If you agree to this without a proper adjustment, you are essentially giving away your hard-earned cash for free. To protect yourself, you must address this in the net working capital peg negotiation. Do not let the buyer treat deferred revenue as a standard operational liability. Instead, negotiate a mechanism where the deferred revenue is either excluded from the working capital calculation or offset by a dollar-for-dollar cash credit at close. Use your weekly Scorecard to track your exact cash-to-deferred-revenue ratios over time. Prove to the buyer that your operational cycle consistently generates this cash and that the cost to deliver the remaining services is far lower than the deferred liability itself. By structuring the working capital peg to account for this operational reality, you ensure you do not leave your liquid cash on the table at close.