The buyer wants to exclude our deferred revenue from the net working capital calculation while keeping the corresponding cash, claiming it is standard. How do we prove this cash is operational and belongs to the seller at close?

Question

Tyler Smith · Accepted Answer

Buyers will often try to define customer deposits for unperformed work as debt, demanding they be deducted from your purchase price, or they will try to include them in the net working capital peg without leaving you the cash. This is double-dipping. They want the cash but also want you to perform the work post-close for free.

To defeat this, you must separate customer deposits from your operational cash flow analysis. Use your EOS weekly scorecard and historical billing records to show the direct correlation between your deposits and your cost of delivery. Explain to the buyer's Quality of Earnings team that these deposits represent pre-funded operational expenses, not free cash flow. If they are keeping the deposits, they must also assume the liability for the associated delivery costs without adjustments to your historical EBITDA.

The correct way to structure this is to establish a net working capital peg that accounts for deferred revenue. Specify that any customer deposits left in the business at close are offset by a corresponding adjustment to the working capital target, or demand that the cash associated with those deposits be distributed to you, with the buyer receiving a working capital credit only when the work is actually performed. This prevents them from capturing both your cash and your labor.