We just signed our LOI and the buyer wants to define working capital using GAAP, but our operational accounting is on a modified cash basis. How do we prevent this from causing a massive price reduction at close?

Question

Tyler Smith · Accepted Answer

A common trap during the transition from LOI to close is the definition of net working capital. If your operational accounting is on a modified cash basis but the buyer purchase agreement mandates strict GAAP compliance, you will face an unexpected price reduction. GAAP requires accruals that will likely increase your liabilities or decrease your assets on paper, making it look like you are delivering less working capital than promised. To prevent this, do not let the buyer use a generic GAAP definition. You must negotiate a specific schedule in the purchase agreement that defines exactly how net working capital is calculated, using the historical accounting methods consistently applied by your company. Specify which balance sheet accounts are included and excluded. Use your monthly financial metrics and your EOS Scorecard data to establish a realistic working capital peg based on your actual operating cycle. Run a dry run calculation thirty days before closing to identify any discrepancies. By locking in a customized accounting methodology rather than standard GAAP, you protect your cash at close and eliminate the buyer ability to retroactively adjust your purchase price.