The buyer's working capital peg calculation includes our long-term security deposits and pre-paid software licenses as current assets, which artificially inflates the target we must leave in the business at close. How do we structure the definition of Net Working Capital to exclude these items?

Question

Tyler Smith · Accepted Answer

Buyers often try to expand the definition of current assets to include non-operational or long-term items, which inflates the net working capital peg and forces you to leave more cash on the table at closing. Prepaid software licenses, security deposits, and long-term insurance premiums are not liquid assets that help run daily operations, and they should not be treated as such in the deal math. You must negotiate a strict definition of working capital that includes only truly operational, short-term assets and liabilities. Argue that prepaid items and security deposits represent sunk costs that do not contribute to the post-closing cash conversion cycle. If the buyer insists on including them, demand a corresponding upward adjustment to the purchase price, or require the buyer to reimburse you cash-for-dollar at close for these pre-paid benefits. To win this argument, use your EOS® operational metrics. Bring your weekly Scorecard data to the negotiating table to demonstrate exactly how much cash is actually required to run your daily operations. Show them your true cash conversion cycle and prove that your automated workflows and tight collection processes keep your operational capital needs exceptionally low. When you can back up your working capital arguments with historical, system-driven data, you expose the buyer's inflated target as a valuation discount in disguise. Keep your net working capital calculation lean, and make sure every asset included is actually helping to generate post-closing revenue.