We collect annual customer payments upfront, resulting in significant deferred revenue on our balance sheet. The buyer wants us to leave cash behind to cover this deferred revenue post-closing. How do we negotiate this cash-free, debt-free definition?

Question

Tyler Smith · Accepted Answer

In a standard cash-free, debt-free deal structure, you keep the cash on your balance sheet at closing. However, if your business collects annual payments upfront, you carry significant deferred revenue. Buyers will argue that they are inheriting an obligation to perform services without receiving the corresponding cash, and they will demand that you leave cash behind to cover it.

To protect your cash, you must negotiate the definition of deferred revenue in the working capital peg. Do not agree to leave dollar-for-dollar cash for all deferred revenue.

Instead, argue that your actual cost to deliver the service is only a fraction of the deferred revenue amount. Use your historical gross margin to prove the true cost of fulfillment. For example, if your gross margin is seventy percent, it only costs you thirty cents on the dollar to deliver the service.

Negotiate to leave only that thirty percent fulfillment cost, plus a reasonable safety margin, in the business at closing. This ensures the buyer has enough working capital to service the contracts, while allowing you to take your hard-earned cash off the table.