The buyer wants to insert a cash sweep mechanism into the purchase agreement during the LOI-to-close period, requiring us to limit our partner distributions. How do we negotiate this without locking up our profits?

Question

Tyler Smith · Accepted Answer

A cash sweep during the transition phase is a common buyer tactic to prevent owners from draining the company's cash reserves before closing. However, if your deal is structured as a debt-free, cash-free transaction, any cash generated by your operations up to the closing date belongs to you, provided you deliver the agreed-upon net working capital target. A restrictive cash sweep unfairly traps your operating profits in the business and transfers that value to the buyer for free. To defeat this, you must establish a clear net working capital peg early in the negotiations. Once this target is set, any cash in excess of this peg should be fully distributable to the partners at or immediately prior to closing. You must argue that as long as you maintain the health of the balance sheet and meet the working capital requirements, the operational profits generated during the due diligence period are yours to keep. Use your monthly financial reporting to show that your business generates consistent cash flow that easily exceeds the required working capital peg. This allows you to continue making scheduled partner tax distributions and regular profit shares without needing buyer approval, keeping your financial planning intact while you work toward a clean close.