The buyer proposed Letter of Intent states that unbilled work-in-progress and deferred revenue will be treated against net working capital at close rather than enterprise value. How should we structure the working capital clause in the LOI to stop them from capturing our operating cash?

Question

Tyler Smith · Accepted Answer

Buyers frequently use vague working capital language in a Letter of Intent to quietly strip cash from sellers at the closing table. In lower-middle-market transactions, enterprise value assumes the business is sold on a cash-free, debt-free basis with a normal level of net working capital delivered at close. If unbilled work-in-progress is excluded from current assets or deferred revenue is treated as funded debt, you surrender liquidity directly to the buyer.

Lock down these working capital definitions directly in the Letter of Intent before signing exclusivity:
- Insist on a defined 12-month trailing average working capital peg methodology, explicitly stating that working capital consists strictly of operating current assets minus operating current liabilities.
- Classify unbilled work-in-progress as an operating current asset. If you have incurred payroll and direct expenses to perform client work that has not yet been invoiced, that asset must offset trade accounts payable.
- Define deferred revenue strictly as an operating current liability rather than funded indebtedness. If a buyer classifies deferred revenue as indebtedness, they deduct it dollar-for-dollar from your closing cash wire while keeping the cash you previously collected.

Never accept language stating that working capital will be agreed upon mutually during definitive agreement drafting. Establish the exact formula, exclusions, and historical calculation baseline inside the LOI exhibits to protect your closing proceeds before handing over deal exclusivity.