We paid upfront for several multi-year software licenses and insurance policies that the buyer will benefit from post-close, but they are excluding these prepaid assets from the net working capital peg. How do we recoup the value of these prepaid expenses at closing?

Question

Tyler Smith · Accepted Answer

In a standard cash-free, debt-free transaction, buyers try to define net working capital in a way that minimizes their cash outlay at close. They often argue that prepaid assets like multi-year software licenses or prepaid insurance have no cash liquidation value and should be excluded from the working capital peg. This is an unfair transfer of value because the buyer will enjoy the benefit of these services post-close without paying for them.

To recoup this value, you must establish during the letter of intent stage that prepaid expenses are current assets that directly reduce the buyer's post-closing operating cash requirements. Under standard accounting principles, working capital is current assets minus current liabilities. Prepaid expenses are legitimate current assets because they replace future cash outflows.

Provide the buyer with a detailed schedule of every prepaid item, showing the exact remaining duration and monthly cash value. If you prepaid a software license that runs for another eighteen months, calculate the exact pro-rata value that extends beyond the closing date.

Insist that these prepaids are included in the closing net working capital calculation. If the buyer refuses, demand a dollar-for-dollar increase in the purchase price to reflect the prepaid balance. This keeps your cash-free, debt-free transition clean and ensures you do not hand over free runway to the new owner at your own expense.