The buyer is insisting on a cash-free, debt-free deal but wants to exclude our prepaid software licenses and AI subscriptions from the net working capital calculation. How do we negotiate the definition of working capital so we get reimbursed dollar-for-dollar for these prepaid operational assets?

Question

Tyler Smith · Accepted Answer

Buyers routinely try to cherry-pick what goes into the net working capital calculation. They want your accounts receivable to flow into NWC, but they will argue that prepaid assets, like multi-year software licenses or upfront AI tool subscriptions, have zero value to them and should be written off. This is a quiet way of transferring your cash to the buyer.

You must fight this by explicitly defining prepaid expenses as current assets in your purchase agreement's net working capital definition. These prepaids are not dead cash. They represent real, future operational cash outflows that the buyer will not have to make post-closing. If you have prepaid a hundred thousand dollars for enterprise software that runs for another year, the buyer is stepping into a fully funded system.

To win this argument during due diligence, provide a detailed schedule of every prepaid contract, including the software seat allocations and utilization rates. Show how these tools are directly tied to the daily scorecard metrics and operational Rocks that keep the company profitable.

If the buyer still refuses to include them in the NWC peg, propose a direct dollar-for-dollar purchase price adjustment outside of the working capital calculation. The buyer can either pay you cash for the remaining term of the prepaid assets at closing, or you can terminate the licenses and let them purchase their own subscriptions on day one. Usually, when faced with the operational disruption of rebuilding software access, the buyer will agree to credit you for the prepaids.