The buyer wants to exclude our customer acquisition costs from the working capital calculations while keeping the future cash generated from those accounts. How do we structure the working capital target to protect our investment?

Question

Tyler Smith · Accepted Answer

Buyers often try to manipulate the net working capital target by excluding prepaid customer acquisition costs or deferred expenses while demanding the full benefit of the future cash flow those investments generate. This is a double-dip that unfairly reduces your cash at close.

To protect your investment, you must establish a clear matching principle in the purchase agreement. If the buyer is acquiring the future revenue streams, they must also assume the associated working capital assets that made those revenues possible. This includes capitalized acquisition costs, prepaid marketing expenses, and advanced vendor deposits.

You should take the following steps to structure a fair target:
- Audit your balance sheet to identify all cash outflows directly tied to future revenue generation, and classify them as working capital assets.
- Calculate a normalized working capital peg using a historical period that matches your typical customer acquisition and billing cycles.
- Reject any attempt by the buyer to write down these assets during the Quality of Earnings review without a corresponding reduction in the future revenue projections used in their valuation model.

In your leadership team meetings, use your weekly scorecard to track these metrics closely. When you have a clear, data-driven understanding of your cash conversion cycle, you can easily defend the inclusion of these assets. This ensures you are fully compensated for the investments you made to secure future growth.