Buyers often use broad definitions of indebtedness and transaction expenses in early deal documentation to deduct ordinary liabilities from our enterprise value. What specific language must we lock down in the Letter of Intent to prevent cash-at-close deductions?

Question

Tyler Smith · Accepted Answer

The headline purchase price in a Letter of Intent is meaningless if you allow the buyer to drain your closing proceeds through loose definitions of indebtedness and transaction expenses. Deals are typically struck on a cash-free, debt-free basis with a normalized target for net working capital. However, aggressive buyers will attempt to classify ordinary operating liabilities as debt-like items, deducting them dollar-for-dollar from your enterprise value at closing.

To protect your purchase price, negotiate unambiguous definitions in the LOI before granting exclusivity:
- Restrict indebtedness strictly to funded debt. Define indebtedness as obligations for borrowed money, bank notes, formal capital leases, and unpaid tax assessments. Explicitly exclude ordinary trade accounts payable, standard customer billing cycles, and routine operational accruals.
- Clarify the boundary between debt and working capital. Buyers often attempt to reclassify accrued employee bonuses, earned but unused paid time off, deferred software subscriptions, and customer warranty reserves as indebtedness. Insist that all normal, recurring short-term operational liabilities remain inside the net working capital calculation, where they do not trigger a dollar-for-dollar cash deduction.
- Define transaction expenses narrowly. The purchase agreement will state that seller transaction expenses are deducted from closing proceeds. Explicitly define transaction expenses as only those investment banking, legal, and accounting fees directly incurred by the seller for the transaction. Reject attempts to shift the buyers diligence costs, lender audit fees, or post-closing integration planning costs into your ledger.

Once exclusivity begins, your leverage to negotiate these definitions drops to zero. Establish rigorous parameters around debt, working capital, and transaction expenses in the LOI term sheet to ensure your enterprise value translates into cash in your bank account.