We collect sixty percent of our project fees upfront, and the buyer wants to classify these customer deposits as working capital rather than cash, effectively leaving our cash trapped in the business at close. How do we negotiate the definition of a debt-free cash-free transaction to protect these upfront proceeds?

Question

Tyler Smith · Accepted Answer

In a debt-free cash-free transaction, cash belongs to the seller and debt belongs to the buyer, but the definition of cash can quickly become a battlefield. Buyers often try to classify upfront customer deposits as deferred revenue or working capital rather than true cash. This forces you to leave those customer-funded dollars in the bank to satisfy the Net Working Capital peg, which is a massive loss for you.

To prevent this, you must negotiate a clear definition of trapped cash in your Letter of Intent. Argue that customer deposits are not working capital because the corresponding fulfillment costs have already been budgeted into your operating expenses. If the buyer insists on including these deposits in working capital, they must agree to a dollar-for-dollar reduction in the Net Working Capital peg to offset the liability.

Alternatively, structure the deal so that the cash associated with customer deposits is paid out to you at close, with the buyer assuming the delivery obligation as part of the overall transaction value. Work with your legal team to ensure that the definitive agreement explicitly excludes customer deposits from the working capital calculation. This keeps your cash in your pocket instead of leaving it on the table.