What terms have you negotiated around customer deposits/deferred revenues?
January 03, 2024
by a searcher from Emory University - Goizueta Business School in Middlesex, NJ 08846, USA
We're looking at a job shop who collects a customer deposit for projects. Customer deposits make up a significant portion of current liabilities in the company. Since we're looking at an asset sale, the transaction will be entirely cash free. After close, the owners will take the cash from the customer deposits and then we're going to be responsible for completing the job without the benefit of the upfront cash. How have you seen other buyers/sellers negotiate this? Is it typically included/excluded from the net working capital peg?
from The University of Chicago in Chicago, IL, USA
Price does not reduce. At closing buyer assumes customer deposit liability and hence reduces the cash delivered to seller at closing. Essentially buyer will have cash on opening balance sheet equal to customer deposit liability. In an Asset purchase cash does not "transfer" from seller to buyer.
2) There are variations to above depending on partial completion, accounting practices, manufacturing, service, construction, etc.
3) Most sellers and their advisors do not understand or may not want to understand this topic. Different English is required in each case to get the point across.
4) There are many other similar liabilities.
5) This issue needs to be addressed carefully while determining price NWC peg.
I teach this subject. And have helped resurrect many broken deals, some of which had well-known accounting firms representing buyer and/or seller.
Happy to talk.
from University of Tennessee in Nashville, TN, USA
STOP!!! The customer deposits don't 'belong' to the Seller; they belong to the customers. The Seller is merely a custodian of the funds until the services are rendered.
To transact, I advise that you EXCLUDE these deposits from the NWC calculation and contractually obligate the transfer of BOTH the cash deposits and the associated liabilityies within your purchase agreement. It has a net-zero impact on the transaction because it should be a dollar-for-dollar match between the assets (cash) and the liabilities (deferred revenue). There should be no argument or resistance from the Seller regarding the nature of these deposits. Specific performance has not yet occurred and there is no justifiable reason that the Seller can claim that cash deposits should be retained by s/he post-close.