The buyer is proposing a cash-free, debt-free deal structure but is trying to set a net working capital peg that includes our customer prepayments as liabilities without giving us credit for the deferred revenue cash. How do we structure the working capital definition to protect this cash at close?

Question

Tyler Smith · Accepted Answer

In a cash-free, debt-free transaction, buyers expect to receive a normal level of net working capital to run the business post-close. However, if your business collects customer prepayments or has deferred revenue, buyers will try to classify these prepayments as liabilities while keeping the corresponding cash on the balance sheet for themselves. This is a common way buyers try to slide a purchase price reduction into the deal.

To defend your cash, you must negotiate a clear definition of net working capital in the Letter of Intent. If the buyer insists on including deferred revenue as a working capital liability, you must insist that the cash associated with those prepayments is also included in the working capital asset calculation. This creates a neutral offset.

Alternatively, you can structure the deal so that deferred revenue is excluded from the working capital calculation entirely. In this scenario, you agree to transition the performance obligation to the buyer, but you adjust the purchase price upward to reflect the cash you are leaving behind to service those customers.

Use your documented delivery processes and your weekly scorecard metrics to show the buyer exactly what it costs to fulfill these obligations. By proving that your fulfillment costs are low and predictable, you can easily defeat the buyer's argument that they need to keep millions of dollars of your cash to cover future operations.