The buyer wants us to deliver our proprietary AI software fully operational at closing, which requires us to prepay all our cloud hosting and licensing fees for twelve months, but they are excluding these prepayments from the net working capital peg. How do we structure the transaction to ensure we are paid for these pre-funded costs?

Question

Tyler Smith · Accepted Answer

Buyers frequently try to game the net working capital calculation by excluding pre-paid assets while demanding that the benefits of those pre-payments carry over to them post-closing. If you prepay twelve months of cloud hosting and software licenses to keep your AI operations running, that is cash out of your pocket that directly reduces your closing proceeds.

To fix this, you must negotiate a strict definition of net working capital that includes prepaid expenses as a current asset. Your argument is straightforward, if you did not prepay these expenses, the buyer would have to pay them month-by-month post-closing. Excluding them from the working capital peg is a backdoor price reduction.

If the buyer refuses to include prepaids in the working capital peg, propose a dollar-for-dollar cash adjustment outside of the peg. Under this structure, the purchase agreement will state that the buyer will reimburse you at closing, in cash, for the exact pro-rata portion of any prepaid software and hosting fees that extend beyond the closing date.

Additionally, use your Accountability Chart to assign your finance leader the task of pulling every contract and invoice related to your AI operations. Do not leave any room for debate. Present a clean, itemized schedule of these pre-paid expenses to the buyer's Quality of Earnings team early in due diligence. By establishing this position before the final purchase agreement is drafted, you protect your cash at the closing table.