The buyer's accounting firm is performing their Quality of Earnings review and wants to treat our customer deposits as debt-like items rather than working capital. How do we fight this classification to prevent a dollar-for-dollar reduction in our cash at close?

Question

Tyler Smith · Accepted Answer

This is a classic buy-side tactic designed to chip away at your purchase price at the eleventh hour. Buyers love to classify customer deposits or prepayments as debt-like items because it means they get to deduct that cash from the purchase price at closing, claiming they need it to fulfill future obligations. You must aggressively defend these deposits as a core component of your net working capital. Explain to the buyer that these deposits are part of your standard operating cycle. They represent the working capital required to purchase materials and fund the labor necessary to deliver the service. If you treat them as debt, you are effectively being penalized for running an efficient cash-flow model. To win this argument, compile a historical analysis showing that your cash balance and customer deposits have consistently coexisted as working capital for years. Prove that this cash is not excess capital but operational fuel. If the buyer remains stubborn, propose a working capital peg that explicitly includes customer deposits in the target net working capital calculation. This ensures that any fluctuations in deposits are normalized through the standard post-closing working capital adjustment rather than treated as a direct reduction of your enterprise value. Keep your finance seat on the Accountability Chart locked on this metric during negotiations.