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 transaction, buyers often attempt to include customer deposits as part of working capital while simultaneously requiring you to leave all cash in the business. This approach is essentially a cash grab that will deplete your business's operational liquidity immediately after closing.

Understanding Customer Deposits

Customer deposits represent unearned revenue on your balance sheet. They are a liability because:

• You are obligated to perform future work.
• You will incur delivery costs to fulfill these obligations.

If the buyer acquires these deposits without also receiving the equivalent cash needed to perform the work, you are effectively paying the buyer to take your customers and complete your obligations.

Protecting Your Liquidity

You must strongly oppose this deal structure. Here are key strategies to protect your business's cash flow:

• Exclude deposits from Net Working Capital (NWC): Insist that customer deposits are explicitly excluded from the Net Working Capital target.
• Demand equivalent cash: Alternatively, negotiate for an equivalent amount of cash to remain in the business to cover future fulfillment costs associated with these deposits.
• Treat as debt: Structure the deal so that unearned revenue is treated as debt on the closing balance sheet. This will result in a dollar-for-dollar reduction in the purchase price but allows you to retain the actual cash, ensuring your cash flow remains balanced.

To support your position, use your weekly [Scorecard metrics](/qa/how-to-review-scorecard-under-five-minutes) to demonstrate to the buyer the precise cash-to-deposit ratio required to deliver outstanding work. Do not permit them to use standard accounting definitions to strip your business of its essential operating fuel. This is crucial for maintaining [business exit readiness](/qa/business-exit-readiness-vs-founder-burnout).

Related questions

• [What are the hidden risks in my business operations that will cause a buyer to walk away or renegotiate the price during due diligence?](/qa/identifying-operational-risks-before-buyer-due-diligence)
• [The buyer is insisting on an earnout tied to EBITDA targets, but we want it tied to gross margin or customer retention metrics to avoid being penalized for their post-close corporate overhead decisions. How do we use our V/TO metrics to negotiate a cleaner earnout structure?](/qa/negotiating-clean-earnout-metrics-vto)
• [We are being valued on a standard trailing twelve-month EBITDA multiple by financial buyers, but we believe a strategic acquirer will pay a premium based on our proprietary software integration. How do we use the Market Approach under IVS 105 to defend a synergistic premium?](/qa/ivs-105-market-approach-strategic-premium)
• [My books are set up to minimize my tax liability, but now I want to sell in three years. What do I need to clean up first so a buyer does not slash my valuation?](/qa/cleaning-financials-for-business-sale-valuation)