The buyer wants to exclude our customer deposits from the Net Working Capital calculation but keep the cash associated with those deposits on our balance sheet at close. How do we structure this to prevent double-counting or a sudden cash shortfall?

Question

Tyler Smith · Accepted Answer

This is a common buyer play designed to engineer an artificial cash windfall at your expense. Customer deposits represent cash you have received for work you have not yet performed. If the buyer excludes these deposits from the Net Working Capital liability peg but forces you to leave the cash in the business to cover the future delivery costs, you are essentially paying them to take your customers.

To prevent this double-counting, you must insist on a reciprocal treatment of customer deposits and the associated cash.

First, if customer deposits are excluded from the working capital liabilities, then the cash corresponding to those deposits must be excluded from the closing cash balance and distributed to you.

Second, if the buyer insists that the cash must remain in the business to fund the operational execution of those contracts, then the customer deposits must be included in the Net Working Capital calculation as a current liability. This adjustment will lower your Net Working Capital at close, resulting in a dollar-for-dollar increase in the purchase price to compensate you for the cash left behind.

Keep the negotiation grounded in accounting neutrality. Use your cash flow reports to show that leaving both the liability and the cash with the buyer is an unfair transfer of value that breaks the working capital peg.