The buyer is trying to classify our long-term operating leases and software subscriptions as debt in the final purchase agreement to reduce our cash proceeds. How do we prevent this pre-closing value leakage?

Question

Tyler Smith · Accepted Answer

A standard letter of intent specifies that the deal will be cash-free and debt-free. While bank loans are obviously classified as debt, buyers often try to expand this definition during due diligence to include operating leases, multi-year software contracts, and even customer deposits. This is a common post-LOI price-chipping tactic designed to lower the net cash you receive at closing.

To block this value leakage, you must establish clear definitions early in the drafting process.

- Define debt strictly as interest-bearing liabilities. This includes traditional bank loans, equipment lines of credit, and shareholder loans.
- Argue that operating leases and software subscriptions are normal operating expenses. These costs are already captured in your profit and loss statements and have already reduced the EBITDA that the buyer used to calculate the purchase price. Classifying them as debt is double-dipping.
- Prove that these commitments are essential for future revenue. Show the buyer how your software automation and facility leases are tied directly to your core processes. These systems are what allow the business to generate the very cash flow they are purchasing.

Use your historical EOS® Scorecard metrics to prove that these software tools keep your team lean and efficient. By showing that these expenses are vital to maintaining your high-margin operations, you shut down the buyer's attempt to penalize you for them.