The buyer wants us to include our multi-year prepaid software licenses in the Net Working Capital peg, which would force us to leave extra cash in the business to cover these prepaids. How do we argue against this under the Reduced Gross Substantial Value framework to protect our cash at close?

Question

Tyler Smith · Accepted Answer

Buyers frequently try to include multi-year prepaid software licenses and other non-cash assets in the Net Working Capital peg, arguing that these items are necessary for ongoing operations. If you accept this, you are forced to leave excess cash in the business at close to offset these prepaids, which effectively reduces your net proceeds.

To defend your cash, apply the concept of Reduced Gross Substantial Value. This framework calculates the net value of your operating assets by excluding cost-free liabilities and non-liquid prepaids that do not represent active cash cycles.

Explain to the buyer that prepaid software licenses are sunk historical costs, not working capital. They do not require a cash outlay from the buyer post-closing to sustain the current level of operations. The buyer will receive the immediate benefit of these software platforms without any near-term cash drain.

Use your weekly EOS Scorecard to show the buyer your actual cash conversion cycle, highlighting that your daily operations are sustained by accounts receivable and accounts payable, not by prepaid administrative tools. Force the buyer to agree to a Net Working Capital target that is based strictly on liquid, short-term operating assets and liabilities. This preserves your cash at close and prevents them from capturing your prepaid assets for free.