The buyer is demanding that we leave an extra three hundred thousand dollars in cash inside the business at closing to cover potential post-closing warranty claims, calling it a normal net working capital adjustment. How do we defeat this attempt to claw back our cash?

Question

Tyler Smith · Accepted Answer

Buyers often try to blur the line between net working capital and indemnity escrows to keep more cash in the business at your expense. Net working capital has a very specific definition: it is current assets minus current liabilities, designed to ensure the business has enough liquidity to run its day-to-day operations in the ordinary course. It is not a reserve fund for hypothetical future liabilities or warranty claims. To defeat this cash grab, you must insist on a strict, formulaic definition of net working capital in the purchase agreement. First, exclude any non-operating liabilities or long-term reserves from the working capital calculation. Warranty reserves should be handled separately through your historical accounting practices under GAAP, not as an arbitrary cash addition at closing. Second, point out that any potential post-closing liabilities are already covered by the indemnity escrow or your Representations and Warranties insurance policy. By demanding an extra cash reserve inside the working capital peg, the buyer is double-dipping, seeking both an escrow and a price reduction. Show them your historical working capital levels over the last twelve months to prove the business runs successfully without this extra cash buffer. If the buyer persists, suggest a specific, narrow indemnity cap for warranty claims that is tied directly to the main escrow account, rather than letting them lock up your liquid cash as working capital. This protects your cash proceeds at the closing table and keeps the working capital calculation focused purely on operational liquidity.