The buyer wants to include prepaid software subscriptions in the NWC peg to inflate our target. How do we keep these prepaids excluded?

Question

Tyler Smith · Accepted Answer

In a net working capital negotiation, buyers will look for opportunities to adjust the peg in their favor. A common trap is how they treat long-term prepaid software subscriptions. The buyer will argue that these prepaids should be included in current assets, which artificially inflates your net working capital target. This means you have to leave more cash in the business at close to meet that inflated target, effectively reducing your proceeds.

You must fight this by arguing that prepaid assets do not represent liquid working capital that runs the daily business. They are prepaid operational expenses that benefit the buyer post-close. Structure the net working capital definition in your Letter of Intent to explicitly exclude prepaid expenses from the current assets calculation, or require the buyer to reimburse you dollar-for-dollar at close for the unused portion of those prepaids.

Back up your argument by showing how your lean operating principles keep your working capital requirements low. When you present clean, historical data showing that your automated subscription model requires minimal cash to operate, you expose the buyer's attempt to inflate the peg. Protect your cash at close by keeping prepaids out of the working capital equation.