The buyer is categorizing our accrued employee paid time off, equipment leases, and customer volume rebates as debt-like items to deduct dollar-for-dollar from cash at close, rather than including them in ordinary Net Working Capital. How do we push back against aggressive debt-like item classifications to protect our closing wire?

Question

Tyler Smith · Accepted Answer

Buyers use debt-like items to execute quiet purchase price reductions. Because M&A transactions are priced on a cash-free, debt-free basis, every dollar classified as debt is deducted straight off your closing proceeds. Ordinary working capital liabilities, by contrast, are absorbed into the rolling working capital target and funded by the ongoing operational cash engine.

To protect your closing wire, enforce clean accounting boundaries between funded financial debt and ordinary operational liabilities:

- Accrued paid time off. Argue that employee PTO is a standard operational liability required to run the company day to day. It does not represent funded debt that requires immediate payoff at closing. If the buyer insists on deducting it, demand that the historical trailing twelve-month working capital peg be recalculated to include accrued PTO as a current liability, which lowers the peg and returns equivalent cash to your closing statement.
- Equipment capital leases. Distinguish between operational leases and true financing leases. If equipment leases provide ongoing operating capacity and are serviced out of monthly operating cash flow, they should be excluded from closing debt payoff requirements, provided the related assets generate the EBITDA being acquired.
- Customer volume rebates. Rebates are normal trade adjustments tied to seasonal customer volume. They belong in current liabilities within Net Working Capital, not as debt items. Show the buyer your historical balance sheets proving that rebate accruals normalize throughout the calendar year.

Require your transaction attorney to define indebtedness strictly in the purchase agreement as interest-bearing borrowings, third-party notes, tax liens, and bank obligations, completely excluding ordinary course operating accruals.