The buyer wants us to deliver a cash-free, debt-free business but insists that our deferred revenue from customer pre-payments must remain in the business without a cash adjustment. How do we protect our cash during working capital negotiations?

Question

Tyler Smith · Accepted Answer

In a typical cash-free, debt-free transaction, the buyer expects to acquire the business without any long-term debt and without any cash on the balance sheet. However, if your business collects cash upfront for services delivered over time, you will have deferred revenue on your books. Buyers will often argue that this deferred revenue is a liability that must remain in the business, while the corresponding cash is stripped out. This is a highly unfavorable structure that forces you to deliver future services without the cash to fund them.

To protect your proceeds, you must address this during the initial deal structuring phase. Argue that deferred revenue is not a financial liability like bank debt, but rather an operational liability. Under IVS 105 and standard accounting principles, you must show that you have already incurred the marketing and sales costs to acquire these customers.

Negotiate a working capital peg that accounts for this dynamic. Ensure the net working capital target is calculated using a formula that either excludes deferred revenue from the liabilities column or requires the buyer to leave an equivalent amount of cash on the balance sheet to fund the fulfillment of those prepaid services.

If the buyer refuses, propose a purchase price adjustment where the enterprise value is increased dollar-for-dollar by the amount of cash required to service the deferred revenue. Do not let the buyer double-dip by keeping your cash and forcing you to keep the liability.