The draft purchase agreement defines company debt to include our accrued paid time off, deferred revenue, and customer retainers, which will reduce our cash proceeds at closing by six hundred thousand dollars. How do we fight these working capital deductions and keep that cash?

Question

Tyler Smith · Accepted Answer

In a standard cash-free, debt-free deal, the headline purchase price is reduced dollar for dollar by indebtedness at close. Aggressive buyers exploit vague Letter of Intent language by stuffing ordinary operational liabilities into the contract definition of indebtedness rather than treating them as standard Net Working Capital (NWC).

If an item like accrued Paid Time Off (PTO) or deferred revenue is classified as debt, it directly docks your cash wire. If it stays inside working capital, it is simply offset by your operational current assets.

To stop this cash leakage before closing, implement three specific negotiating boundaries:
- Accrued PTO must remain inside current liabilities in the NWC peg. Argue that PTO is an ongoing operational overhead obligation that is funded by continuous business cash flow, not a borrowed financial obligation.
- Deferred revenue in a service or subscription business should be excluded from debt if the marginal cost to deliver the underlying service is minimal. If your gross margin is seventy percent, delivering on that deferred revenue costs thirty cents on the dollar. Do not let the buyer deduct one hundred percent of the cash balance off your purchase price.
- Customer deposits must be treated as operational working capital offset by work-in-progress inventory or contract receivables.

Address these definitions explicitly during LOI drafting rather than waiting for the definitive purchase agreement. When you manage working capital definitions with operational precision, you protect your net liquidity and avoid surrendering hundreds of thousands of dollars to institutional financial maneuvering.