One of the important documents in an M&A transaction is the closing statement, which details the purchase price of the acquisition, how the proceeds are distributed, identifies debt and debt-like items, and presents how working capital will impact the transaction. Think of it as the summary presentation of the math of the deal.  The closing statement is typically the responsibility of the seller, and ultimately becomes part of the purchase agreement—the legal contract agreed to by the buyer and seller. We sat down with Corum Executive Vice President and Director, David Levine, to get his insights on some of the things a seller needs to know about the closing statement.

The balance sheet feeds the closing statement

Other than the purchase price, any holdbacks, and transaction expenses such as advisory fees, accounting and legal fees, the information in the closing statement is fed by the closing balance sheet. Notably, the treatment of cash, working capital, and deferred revenue are brought to light in the closing statement.  Consider the following hypothetical closing statement and balance sheet.

Closing Statement

  Closing Statement

Purchase Price


Rollover Shares


Total Cash Consideration


Cash on Balance Sheet


Target Working Capital



Working Capital Increase / Decrease


Estimated Indebtedness


Deferred Revenue  at 30% of Total Deferred


Estimated Transaction Expenses at Close


CEO Transaction Bonus


Estimated Closing Cash Consideration





Net Closing Cash Consideration


Closing Date Consideration Rollover Shares



Escrow Cash Amount


Closing Date Cash Disbursed to Shareholders Total



Transaction Expenses at Close


Investment Banker, Legal, Accounting


Balance Sheet (Snapshot)


Current  Assets


Cash and Cash Equivalents


Accounts Receivable


Other Receivables


Prepaid Expenses


Employee Advances


Total Current Assets


Long-Term Assets


Property and Equipment


Accumulated Depreciation


Intangible Assets


Accumulated Amortization


Total Long-Term Assets





Current Liabilities


Accounts Payable


Customer Credits


Sales Tax Payable


Deferred Officer Compensation


Deferred Revenue/Prepaids


Total Current Liabilities


Long-Term Liabilities


Bank Loan






Estimated Closing Net Working Capital


Notice the following correlation between the closing statement and the balance sheet:

Closing Statement

Balance Sheet

Cash on Balance Sheet: 500,000

Cash and Cash Equivalents: 500,000

Target Working Capital: 400,000

Estimated Closing Net Working Capital: 400,000

Deferred Revenue at 30% of Total Deferred: 225,000

Deferred Revenue/Prepaids: 750,000 (x30% = 225,000)

Levine stresses that sellers need to have an understanding of their balance sheet and how it feeds the deal. He notes that most sellers focus on their profit and loss (P&L) statement and enterprise value when negotiating the Letter of Intent (LOI), but they often overlook the nuance and impact that the balance sheet will have on closing the transaction. He says, "The balance sheet is going to be heavily diligenced by the legal and accounting firms to arrive at a mutually agreeable closing statement. So the seller needs to understand what's in there and get comfortable with it. And often times they don't."

Cash on the balance sheet

Although most technology transactions are done on a cash-free debt-free basis, cash is typically identified in the closing statement and becomes a component of the sources of funds. In cash-free, debt-free transactions, all the cash on the balance sheet is delivered to shareholders after reductions for indebtedness. Indebtedness comprises debt and debt-like items, including short-term and long-term debt plus the expenses to close the transaction. Levine says often sellers will leave cash in the business to optimize for taxes. He also notes that buyers may attempt to keep excess cash on the balance sheet to fund the business after the close. In any case, it is critical to plan early for how to handle cash on the balance sheet. Often sellers will make cash distributions to shareholders ahead of the signing of the LOI or prior to closing the transaction.

Working capital

In most tech M&A transactions the buyer expects the seller to deliver a normalized level of working capital at closing. Working capital (current assets minus current liabilities) is the liquidity sufficient to run the operations of the seller’s business immediately after closing. It is calculated by subtracting the specified current liabilities of the business from the specified current assets. The intent is for working capital to be adequate so that the buyer does not have to add funds to run the company immediately after the deal closes.

The closing statement has a line item for Target Working Capital as well as for Working Capital Increase/Decrease. The target working capital, or "peg", is a negotiated estimate of the working capital that will be needed at closing to continue running the business. It is a value agreed on by the buyer and seller, usually at the end of financial due diligence.  It is also a value that can have an impact on the purchase price, something that Levine says sellers should understand prior to the signing of the LOI. A few days before closing, the seller delivers a closing balance sheet, and the working capital is compared to the agreed working capital peg. If the closing working capital is greater than the peg, the purchase price is increased by the difference in the amounts. Conversely, if the closing working capital is less than the peg, the purchase price is reduced by the difference in the amounts. The amount of the adjustment is listed in the Working Capital Increase/Decrease line item.

Typically, the peg is based on a twelve-month historical average of the selling company's working capital. Depending on when the transaction will close, this doesn't always represent the working capital requirements of the business. For example, a company that has seasonal peaks and valleys in accounts receivable might have a widely variable monthly working capital over the course of twelve months. Because of this, it's important for the seller and buyer to agree on a working capital value that reflects the actual needs of the business going forward.

It's also important to understand that the working capital-related adjustment to the purchase price does not necessarily end at closing. Typically, the buyer will do another calculation after the closing to determine if there are any working capital and balance sheet adjustments. If the balance sheet adjustments differ from the delivered closing balance sheet, the purchase price may be subject to further adjustments. This is called a "true-up."

Deferred Revenue

Another item that can have an impact on working capital is the treatment of deferred revenue, something that can be a major point of contention during closing. Deferred revenue refers to accrued revenue that the selling company is yet to recognize for products or services that have not yet been delivered. Levine notes that the way deferred revenue is handled is another thing that sellers often do not understand. He says, "I've seen CEOs make mistakes, not understanding how deferred revenue works."

According to Generally Accepted Accounting Principles (GAAP), deferred revenue is treated as a liability, and may be counted as a liability in the net working capital calculation, or treated as debt.  As the product or service is delivered, deferred revenue is recognized proportionally as revenue. Levine provides a simple example. "Let's say a seller invoices their customers $1 per month for their software. But if they invoice a customer the entire yearly total of $12 up front, $1 is recognized the first month as revenue under GAAP, and the remaining revenue to be recognized, in this case $11, is considered deferred revenue. Then in each subsequent month, the deferred revenue is reduced by $1 on the balance sheet and recognized in the same period as revenue on the P&L. So, in the second month, the deferred revenue amount on the balance sheet is reduced to $10, and $1 is recognized as revenue on the P&L."

It is common for buyers and sellers to have differing views on how to calculate the size of the deferred revenue liability that will be a component of the working capital peg. Buyers may attempt to argue that the deferred revenue liability is larger than it actually should be. Sellers typically prefer to have it be as small as possible.  Because of these differing viewpoints, Levine says there is usually a lot of negotiation around the handling of deferred revenue. He stresses that buyers should not be able to treat the full amount of the deferred revenue as debt-like because the liability for software companies is typically only the cost to deliver the revenue. He says, "Imagine the seller in the previous example is a SaaS business. The revenue is $1 per month. Let's say the cost to deliver that dollar of revenue is 20 cents. That's the cost of goods sold or cost of sales. It is generally the only liability associated with delivering the software revenue. Therefore, for the purposes of closing the deal, the deferred revenue in the first month is not $11, it is $2.20."

Levine typically advises sellers to negotiate the definition of working capital such that only the cost of delivering the deferred revenue is included as a liability in the working capital calculation. In the closing statement example shown above, the line item Deferred Revenue at 30% of Total Deferred indicates that the buyer and seller agreed on 30% of the deferred revenue be treated as a liability.

A lot goes into the closing statement

Levine is quick to point out that all of the parties work diligently to ensure that the closing statement is accurate. The calculations of the entries in the closing statement are heavily reviewed during the due diligence period, and audited during Quality of Earnings (QoE) review. Even the LOI can play a role. Although non-binding, the LOI serves as the framework for the transaction and generally both parties will attempt to adhere to what has been agreed to in it.

Levine’s advice to sellers: "Understand your balance sheet and know how working capital and deferred revenue work. That will go a long way to understanding how it all pulls together in the closing statement."