Interested in thoughts on how to treat customer deposit liabilities in an acquisition.
Target tends to run negative net working capital due to sizable advance customer deposits. These deposits are paid to reserve the provision of the company's services at a future date. Balance could run as high as 50% of the purchase price at close. NWC excluding cash has been relatively consistent over time. NWC including cash has fluctuated much more dramatically based on the amount of cash on the seller's books. Cash as a % of customer deposits as been as low as 25% and as high as 150%, most recently hovering around 100%.
Currently I'm treating this account as debt (essentially a loan from future customers), requiring that the debt be extinguished at close and excluding this account from the NWC peg process. Obviously I don't want the seller to go and refund these deposits, so the way to effect this would be having him leave an equal amount of cash in the business at close (preferable) or through a revision to the purchase price.
However, I'd like to be sure that I'm making a market ask. At some point his outside accountant will have eyes on this so I'd like to know in advance where the common ground is likely to be. Thoughts and advice from this community are welcome!
How to treat large customer deposit account in buyout
by a searcher from University of Southern California
More on Searchfunder
Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.
We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.
We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.
Consider a situation where the business has taken a 100% non-refundable deposit, produced the product, wrapped it and set it aside for shipping to the customer. At that point (in most accounting) you have the full amount of the deposit liability on the books. It's going to be tough to require that seller leave that amount of cash in the company (or treat it as funded debt that reduces the purchase price.)
Curious where you are in your transaction process. If you've signed an LOI, how did you address this when stating the purchase price and what you are buying? It sounds like it's a material portion of the deal value.