The buyer's LOI includes a Net Working Capital target, but they are insisting on a cash-free, debt-free transaction that excludes our cash-equivalents like customer deposits for future work. How do we prevent this structure from draining our operational liquidity at close?

Question

Tyler Smith · Accepted Answer

In a cash-free, debt-free deal, buyers often try to grab customer deposits as part of working capital while forcing you to keep all the cash. This is a cash grab that will starve your business of liquidity immediately after closing. Customer deposits represent unearned revenue. They are a liability on your balance sheet because you still have to perform the work and incur the delivery costs. If the buyer keeps the deposits but does not receive the offsetting cash to perform the work, you are effectively paying the buyer to take your customers. You must fight this structure aggressively. Insist that customer deposits are excluded from the Net Working Capital peg, or demand that an equivalent amount of cash is left in the business to cover the future fulfillment costs. Alternatively, structure the deal so that unearned revenue is treated as debt on the closing balance sheet. This forces a dollar-for-dollar reduction in the purchase price but allows you to keep the actual cash, keeping your cash flow balanced. Use your weekly Scorecard metrics to show the buyer the exact cash-to-deposit ratio required to deliver outstanding work. Do not let them use standard accounting definitions to strip your business of its operating fuel.