The buyer is trying to class our prepaid expenses and security deposits as non-working capital assets, which artificially lowers our net working capital target and forces us to leave more cash on the table. How do we defend our balance sheet classification to protect our cash at close?

Question

Tyler Smith · Accepted Answer

During the working capital peg negotiation, buyers often try to exclude prepaid expenses, security deposits, and other current assets from the calculation while keeping the benefits of those assets post-close. This is a classic double-dip tactic designed to force you to leave extra cash in the business to cover the target working capital.

To defend your balance sheet, you must argue that prepaid expenses, such as annual software licensing renewals or insurance premiums, directly reduce the buyer's post-closing cash requirements. Because you have already paid these expenses, the buyer will not have to write those checks for months after taking ownership. Therefore, these prepaids are functional working capital assets that must be included in the net working capital target.

The same logic applies to security deposits. These are cash-like assets that will eventually return to the operating business. Excluding them from the working capital assets is an unfair adjustment that artificially inflates the amount of cash you must leave behind.

Specify the exact treatment of every balance sheet account in the letter of intent and the definitive purchase agreement. Ensure your financial team defines working capital strictly in accordance with GAAP, applied consistently with your historical practices. By defending these assets, you protect your cash at close and prevent the buyer from using working capital adjustments to chip away at your valuation.