We are drafting the definitive purchase agreement after signing our LOI, and the buyer is insisting on a net working capital peg that does not account for our prepaid software expenses. How do we negotiate the working capital adjustment mechanism to ensure we are fairly compensated for these operational assets?

Question

Tyler Smith · Accepted Answer

Negotiating the net working capital peg is one of the most contentious parts of closing a deal. Buyers often try to exclude prepaid expenses, such as software licenses or insurance, from the working capital calculation while still expecting to benefit from those assets post-close.

If you have prepaid for key operational tools that the buyer will use, excluding them from the peg effectively forces you to leave cash in the business for their benefit without compensation.

To protect your cash at close, you must insist that prepaid operational assets are included in the definition of current assets in your purchase agreement.

Argue that these prepaid items are essential for the daily operations of the business. If you had not prepaid these expenses, the buyer would have had to pay for them immediately upon taking ownership, which would have required them to inject cash.

Provide a detailed ledger showing the exact amortization schedule of these prepaids to prove their tangible, near-term value.

Align this with your operational reporting to show how these prepaid tools directly support your current Scorecard metrics. By presenting a clear, mathematical argument that links these prepayments to ongoing operational continuity, you can successfully negotiate a fair working capital peg that protects your hard-earned cash.