The buyer's definition of debt in our cash-free debt-free Letter of Intent includes our multi-year software-as-a-service subscriptions and operating vehicle leases. How do we negotiate these definitions in the purchase agreement to prevent a massive dollar-for-dollar reduction in our final proceeds?

Question

Tyler Smith · Accepted Answer

In a cash-free debt-free transaction, the buyer expects you to pay off all traditional bank debt at closing. However, aggressive buyers will attempt to expand the definition of debt-like items to include ordinary operating liabilities such as software subscriptions, long-term equipment leases, and deferred compensation. If you accept their broad definitions, they will subtract these liabilities dollar-for-dollar from your final purchase price.

To defend your proceeds, you must draw a hard line between financial debt and normal operating liabilities.

- Categorize your software subscriptions and vehicle leases as ordinary operating expenses that are already factored into your EBITDA calculations. Arguing that these expenses are necessary to generate the very EBITDA the buyer is purchasing prevents them from double-counting.
- Exclude standard operating leases from the definition of debt in the definitive purchase agreement, citing their classification under historical accounting standards.
- Ensure your net working capital target explicitly accounts for any prepaid balances or accrued liabilities related to these contracts, keeping them out of the debt column.

This negotiation requires operational clarity. Use your Accountability Chart to assign your finance leader the task of mapping every long-term contract and lease. Presenting a transparent, well-documented schedule of operating expenses early in the diligence process prevents the buyer from reclassifying ordinary overhead as debt, preserving your hard-earned valuation.