During the LOI-to-close phase, the buyer is proposing a net working capital peg that includes our customer deposits as operating liabilities, which would force us to leave a massive amount of cash in the business. How do we negotiate the working capital definition to protect our cash at close?

Question

Tyler Smith · Accepted Answer

The net working capital peg is one of the most common places where sellers lose money at the closing table. Buyers often try to define working capital broadly to force you to leave excess cash behind to fund post-close operations. If your business model involves receiving upfront customer deposits, the buyer may argue these are deferred revenue liabilities that must be offset by cash.

To protect your cash, you must negotiate the specific definitions in the purchase agreement. Use your historical cash flow data to prove that your customer deposits are immediately put to work to cover direct delivery costs. Show that your cash conversion cycle is highly efficient due to your systemized operations.

Use your Accountability Chart to demonstrate that your finance seat has a clear, documented process for managing working capital. Present a rolling twelve-month analysis that excludes customer deposits from the operating liabilities definition, arguing that these deposits are part of your normal billing cadence rather than a debt-like liability. By showing that your operating cash requirements are structurally lower than their generic formulas suggest, you can negotiate a lower working capital peg and distribute the excess cash to yourself at close.