In the draft purchase agreement, the buyer is trying to classify our accrued employee PTO, deferred rent, and annual software subscriptions as debt-like items deducted dollar-for-dollar from the enterprise value rather than working capital. How do we fight this reclassification?

Question

Tyler Smith · Accepted Answer

Buyers love shifting liabilities from the net working capital calculation into the debt-like items bucket. When an item sits in working capital, it balances against current assets and normal fluctuations. When an item is labeled debt or debt-like, it reduces your purchase price dollar-for-dollar at closing. To stop this equity erosion, you must establish clear definitional boundaries in your purchase agreement.

Normal operational liabilities that run continuously through your business cycle belong in working capital, not debt. Accrued paid time off is an ongoing cost of labor paid out in the ordinary course of business, not funded debt. Deferred rent is a non-cash accounting convention under GAAP lease accounting, not a commercial loan. Annual software subscription prepayments are standard operating expenses, which often come with matching prepaid assets that the buyer is ignoring.

Provide trailing twenty-four-month historical data showing that these accruals have operated as consistent revolving liabilities funded by ordinary cash flow. Use your Level 10 Meeting™ Scorecard data to prove these balances are stable operational obligations, not unpaid back liabilities.