We want to prevent transaction expenses and post-closing adjustments from eroding our target cash at close. How do we structure the definitions of transaction expenses and debt in the purchase agreement to avoid unexpected deductions?

Question

Tyler Smith · Accepted Answer

The final cash you receive at close is often thousands of dollars less than the enterprise value listed in the Letter of Intent because of loose definitions in the purchase agreement. Buyers will try to classify every unpaid bill, employee bonus, and technology expense as debt or transaction expenses to reduce their cash output. To prevent this leakage, you must define these terms with absolute precision. First, draft a narrow definition of debt. It should only include interest-bearing liabilities, such as bank loans, lines of credit, and equipment leases. Do not allow the buyer to classify normal operating liabilities, like accrued vacation, customer deposits, or standard vendor trade payables, as debt. These should belong in your net working capital calculation instead. Second, cap your transaction expenses. Define legal, accounting, and investment banking fees clearly, and ensure that any prepayments or retainers you have already paid are credited back to you. Third, address your employee transaction bonuses. If you are rewarding your key leadership team for a successful exit, structure these payments so they are paid directly out of the gross transaction proceeds at close rather than being deducted from your working capital peg. Keep your corporate bookkeeping clean and resolve any outstanding disputes before entering exclusivity to ensure a clean transaction.