The buyer wants us to deliver a cash-free, debt-free business with a normal level of working capital, but they want to exclude our customer deposits from the calculation. How do we stop them from double-counting these deposits?

Question

Tyler Smith · Accepted Answer

Customer deposits represent cash received for work that has not yet been performed. In a cash-free, debt-free transaction, buyers love to argue that because this cash is in your bank account at close, it belongs to you, but the associated liability to perform the work must remain with the business as working capital. This is a classic double-dipping trap.

If the buyer keeps the customer deposits in their working capital calculation but forces you to leave the physical cash behind to cover them, you are effectively paying the buyer to take your customers. You must fight this by insisting that customer deposits are treated as debt-like items.

To resolve this fairly, use a simple matching principle:
- If you keep the cash from the deposits at close, the buyer must reduce the purchase price or treat the unearned revenue liability as debt, which you pay off at close.
- If the buyer wants the business to perform the work post-close, the actual cash from those deposits must be transferred to the buyer at closing as an addition to the working capital peg.

Clearly define this treatment in the letter of intent. Ensure your working capital target, or peg, is calculated using a consistent methodology that matches assets with their corresponding liabilities. If the liability is in the peg, the cash must be in the peg.