Cash-Like Items - Increasing Deal Value Beyond Bank Accounts

Most sellers focus on the headline purchase price, celebrating when they secure a strong multiple. Then they watch tens or hundreds of thousands slip away during the mechanical calculations that determine actual proceeds. The difference between sophisticated and unsophisticated sellers often comes down to understanding these mechanics, particularly the characterization of cash-like items that can meaningfully increase what you actually take home.

Executive Summary

In middle-market M&A transactions, the purchase price you negotiate represents only part of the equation determining your actual proceeds. Cash-like items (prepaid expenses representing future benefit, deposits recoverable upon contract completion, and similar assets that will convert to cash or economic equivalent value) can increase seller proceeds when properly identified and included in cash calculations. Yet many sellers overlook these items entirely, potentially leaving meaningful value on the table.

This financial mechanics issue creates negotiation opportunities that mirror debt-like item disputes but with opposite economic impact. Where buyers seek to characterize items as debt-like to reduce seller proceeds, sellers benefit from characterizing items as cash-like to increase their take-home value. The characterization battles that emerge during purchase price negotiations can influence proceeds by amounts that matter significantly in lower middle-market transactions, though the actual impact varies considerably based on the specific balance sheet composition, buyer sophistication, and negotiating leverage.

Before investing significant effort in cash-like item optimization, sellers should honestly assess their potential. Businesses with minimal prepaid expenses and few deposits may find limited opportunity regardless of negotiation skill. Those with substantial balance sheet complexity (multiple facility deposits, significant prepaid contracts, and recoverable bonds) may discover meaningful optimization potential. This assessment forms the critical first step before committing preparation resources.

Understanding cash-like item recognition offers sellers the opportunity to capture value that buyers might otherwise ignore or deliberately exclude. This article examines cash-like item characterization across common categories, identifies arguments supporting favorable treatment for various balance sheet items, and provides frameworks for maximizing recognized cash through disciplined identification and negotiation strategies. We also address realistic expectations about when these efforts pay off and when they may not be worth the negotiating capital expended.

Introduction

When buyers and sellers negotiate M&A transactions, they typically structure deals using enterprise value as the starting point, then adjust for cash, debt, and working capital to arrive at the equity value paid to sellers. In our experience with U.S. middle-market transactions, most deals use a “cash-free, debt-free” structure, though variations exist based on industry norms, geographic considerations, and buyer preferences. This structure creates immediate negotiation territory around what qualifies as “cash” for purposes of these calculations. Territory where prepared sellers can potentially capture additional proceeds.

The mechanics work straightforwardly in concept: the buyer pays enterprise value, plus cash on the balance sheet, minus debt. If you can characterize an asset as cash-like and include it in the cash calculation, your proceeds increase dollar-for-dollar (assuming the buyer accepts that characterization without offsetting adjustments elsewhere). This assumption proves critical: sophisticated buyers understand these dynamics and may seek offsetting value through other deal terms. Conversely, if that same asset falls outside the cash definition and into working capital, it may not increase your proceeds at all. It might even reduce them if working capital exceeds the target.

Cash-like items occupy a gray zone between clearly liquid assets and operational working capital. Prepaid insurance premiums, security deposits, customer deposits held for others, tax receivables, and similar items all possess characteristics that can support cash-like treatment under the right circumstances. The challenge lies in identifying which items qualify, understanding the arguments that support favorable characterization, and negotiating effectively while maintaining the collaborative relationship needed to close the deal.

Based on our firm’s experience across dozens of lower middle-market transactions, we have observed that the potential value from cash-like item optimization varies dramatically based on balance sheet composition. Asset-intensive businesses (manufacturing, distribution, multi-location services) typically offer more optimization potential than asset-light professional services or technology companies. Before investing preparation effort, we encourage sellers to conduct an honest assessment of their specific balance sheet to determine whether meaningful opportunity exists.

Understanding Cash-Like Item Mechanics

The foundation of cash-like item negotiation lies in understanding how purchase price mechanics allocate value between buyer and seller. Most U.S. middle-market transactions in our experience use a “cash-free, debt-free” structure where the buyer acquires the business at an agreed enterprise value, then adjusts for net debt (debt minus cash) and working capital variations from a target level.

Under this structure, items characterized as cash increase seller proceeds because they’re added to enterprise value to determine equity value. Items characterized as debt reduce seller proceeds through subtraction. Items that fall into working capital affect proceeds only to the extent actual working capital differs from the negotiated target. Even then, the impact depends on whether the transaction uses a dollar-for-dollar true-up or a collar mechanism that absorbs small variations.

This mechanical reality creates the economic incentive for cash-like item negotiations. In principle, every dollar successfully characterized as cash flows to the seller. But sophisticated buyers understand this dynamic equally well, and negotiations rarely occur in a vacuum. Winning a characterization battle on one item may affect buyer flexibility on other deal terms, working capital targets, or even headline valuation. This interconnected dynamic means that aggressive cash-like item positions can sometimes prove counterproductive when they damage the broader deal relationship.

Comparing Approaches: Cash-Like Characterization vs. Working Capital Target Negotiation

Sellers seeking to optimize proceeds have two primary mechanical approaches: pushing for cash-like characterization of specific items, or negotiating more favorable working capital targets. Understanding when each approach works best helps sellers allocate negotiating capital effectively.

Cash-like characterization works best when:

• Specific items have strong cash-like characteristics (near-term recoverability, clear documentation)
• The seller has multiple distinct items that individually warrant attention
• The buyer is receptive to item-by-item analysis
• Balance sheet complexity creates genuine characterization ambiguity

Working capital target negotiation may prove superior when:

• Cash-like items are few or have weak characterization arguments
• The seller’s working capital fluctuates seasonally, creating target-setting opportunities
• The buyer resists granular characterization discussions
• Time constraints limit detailed item-by-item negotiations

In practice, sophisticated sellers pursue both approaches simultaneously, calibrating emphasis based on deal dynamics and buyer receptivity. The approaches aren’t mutually exclusive. Success with cash-like characterization for specific items can coexist with favorable working capital target negotiations on remaining items.

A Detailed Numerical Example

Consider a hypothetical scenario that illustrates both the potential and the complexity of cash-like item optimization. This example uses constructed figures to demonstrate mechanics rather than represent typical outcomes:

ABC Manufacturing is being acquired at an enterprise value of $12 million. At the anticipated closing date, the balance sheet shows the following items that might qualify for cash-like treatment:

Note that these figures represent a business with above-average balance sheet complexity. Many lower middle-market businesses (particularly service companies) would show significantly smaller potential cash-like item totals, sometimes under $50,000.

Scenario A: No Cash-Like Item Negotiation If the seller accepts a generic cash definition limited to “cash and cash equivalents,” all $316,000 likely falls into working capital. Whether this affects proceeds depends on where actual working capital lands versus the target:

• If actual working capital equals target: No proceeds impact
• If actual exceeds target by $100,000: Seller receives $100,000 true-up (but this would happen regardless of cash-like characterization)
• If actual falls below target: Seller pays true-up

Scenario B: Successful Cash-Like Characterization If the seller successfully negotiates to include these items in the cash definition:

• $316,000 added to enterprise value in calculating equity proceeds
• Working capital target adjusted downward by $316,000 to reflect removal of these assets
• Net effect: Seller receives $316,000 in additional proceeds

Scenario C: Partial Success (More Realistic) In our experience, most negotiations result in partial acceptance rather than complete success or failure. Based on patterns we’ve observed, success rates vary significantly by item type. Assume the buyer agrees to:

• Prepaid insurance (8 months): Included as cash-like ($96,000)
• Facility deposits: Included as cash-like ($75,000)
• Utility deposits: Included as cash-like ($18,000)
• Software licenses: Rejected (buyer argues this is operational)
• Equipment deposit: Rejected (buyer wants credit for equipment arriving)
• Tax overpayment: Split (buyer accepts 80% given uncertainty) ($28,000)

Net cash-like items recognized: $217,000

This represents $217,000 in additional proceeds. Meaningful value, though less than the theoretical maximum.

Critical Caveat: The buyer in Scenario C may seek offsetting value elsewhere. Perhaps they negotiate a slightly lower enterprise value multiple, a more aggressive working capital target on remaining items, or stricter representations and warranties. Sophisticated sellers understand that cash-like item negotiation occurs within the context of overall deal economics, not in isolation. We have observed deals where aggressive cash-like item positions damaged buyer relationships sufficiently to cost sellers value on other terms exceeding the cash-like items at stake.

Categories of Cash-Like Items

Cash-like items appear across multiple balance sheet categories, each with distinct characteristics affecting both the strength of cash-like arguments and the likelihood of buyer acceptance. The following framework helps sellers conduct thorough identification while maintaining realistic expectations.

Prepaid Expenses

Prepaid expenses represent future economic benefits already paid for in cash. Common examples include prepaid insurance premiums, prepaid rent, prepaid software licenses, prepaid maintenance contracts, and prepaid professional services retainers.

The argument for cash-like treatment rests on substitutability: the buyer would need to spend cash to obtain these benefits if they weren’t already prepaid. When you’ve prepaid twelve months of insurance and the transaction closes with eight months remaining, those eight months represent value the buyer receives without immediate cash outlay.

Strength of Cash-Like Argument by Prepaid Type:

These success rate estimates reflect patterns we have observed across our transaction experience and should be viewed as rough guidance rather than statistical certainty. Actual outcomes depend heavily on specific circumstances, documentation quality, and negotiation dynamics.

Industry Variations: In our experience, manufacturing and distribution businesses typically carry larger prepaid balances due to insurance requirements, equipment maintenance contracts, and facility-related deposits. Service businesses and technology companies often have smaller prepaid balances, reducing optimization potential. Seasonal businesses may show significant prepaid variation depending on timing. A retailer closing in August might show substantial prepaid insurance from annual renewals, while the same business closing in June might show minimal balances.

Deposits and Security Bonds

Many businesses hold deposits that will convert to cash upon contract completion or termination. Security deposits on leased facilities, utility deposits, equipment deposits, customs bonds, and performance bonds all fall into this category.

These deposits represent cash temporarily deployed but ultimately recoverable. The cash-like argument centers on the fact that these amounts will return as cash. The only question is timing and certainty.

Factors Affecting Deposit Cash-Like Treatment:

Strategic vs. Financial Buyer Differences: In our experience, private equity buyers often prove more receptive to cash-like treatment of deposits because they focus heavily on balance sheet optimization and understand the mechanics intuitively. Strategic buyers (particularly those making their first acquisition) may resist cash-like treatment for deposits, viewing them as “part of the business” rather than separable value. Tailoring your approach based on buyer type improves negotiation outcomes, though individual buyer sophistication varies regardless of category.

Tax-Related Items

Tax overpayments, refund receivables, and certain tax credits can qualify as cash-like items depending on their nature and expected realization timeline. If your business overpaid estimated taxes and expects a refund within months of closing, that refund represents potential cash-like value.

Tax-related cash-like items require careful analysis because tax positions often involve judgment and contingency. Buyers legitimately concern themselves with the certainty of tax refunds and the possibility of offsetting liabilities.

Tax Item Analysis Framework:

The seller’s argument for cash-like treatment strengthens when:

• The tax item involves mechanical calculations rather than interpretive positions
• Refund timing is predictable based on filing history
• No offsetting liabilities or uncertain tax positions exist
• The refund has been filed and acknowledged by taxing authorities

Buyers reasonably resist cash-like treatment when:

• The refund depends on positions that might be challenged
• Timing extends beyond 12 months
• The business has outstanding audits or disputes with tax authorities

Customer-Related Assets

Certain customer-related assets, while not appearing as cash, possess cash-like characteristics. Customer deposits held for future work, progress billings on contracts, and advance payments received all warrant evaluation. But with significant caveats.

The analysis of customer-related items often proves complex because these items may carry offsetting obligations. Customer deposits held for future work, for instance, are typically offset by deferred revenue liabilities. The net position (and whether any value should be characterized as cash-like) depends on the specific contractual arrangements and accounting treatment.

When Customer-Related Items May Have Cash-Like Value:

• Deposits exceeding expected fulfillment costs (profit element)
• Forfeitable deposits with low historical forfeiture rates
• Retainers that will be earned without additional service delivery

When They Typically Don’t:

• Deposits fully offset by deferred revenue
• Progress billings representing work not yet invoiced
• Advance payments for services not yet rendered

When Cash-Like Item Optimization May Not Be Worth It

Honest assessment requires acknowledging that cash-like item optimization isn’t always economically rational. Several scenarios suggest limiting investment in this negotiation area.

Small Balances Relative to Deal Size: If your total potential cash-like items amount to $50,000 on a $15 million transaction, the negotiating capital and advisory fees required to optimize these items may exceed their value. Professional advisor time for thorough cash-like item analysis (including identification, documentation, and negotiation support) typically costs $10,000-$30,000 in our experience, though fees vary based on transaction complexity and advisor billing rates. Focus instead on larger value drivers like working capital targets, earnout structures, or representation and warranty provisions.

Weak Negotiating Position: Sellers facing competitive pressure, time constraints, or limited buyer interest may need to preserve negotiating leverage for more critical terms. Pushing hard on cash-like items while accepting unfavorable indemnification terms represents poor prioritization.

Relationship-Sensitive Transactions: In sales to management teams, family members, or strategic partners where ongoing relationships matter, aggressive cash-like item negotiation may create friction disproportionate to the economic value at stake. We have seen deals where aggressive characterization positions (even when technically justified) damaged buyer relationships enough to affect earnout cooperation, transition support, or other post-closing dynamics.

Limited Balance Sheet Complexity: Asset-light businesses with minimal prepaid expenses, no significant deposits, and simple balance sheets offer little optimization potential. Recognizing this early prevents wasted preparation effort. Professional services firms, software companies, and consulting businesses often fall into this category.

Transaction Timeline Pressure: Thorough cash-like item analysis requires time. Typically 15-30 hours of owner and CFO time for businesses with moderate balance sheet complexity, extending to 40-60 hours for complex multi-location businesses with numerous contracts and deposits. Add additional time from your M&A accountant, typically 10-20 hours depending on documentation quality. Compressed deal timelines may not allow adequate preparation, and raising issues late in negotiations often proves counterproductive.

Building the Cash-Like Item Inventory

For sellers whose situations warrant cash-like item optimization, thorough preparation significantly improves outcomes. This preparation serves multiple purposes: identifying the full universe of items warranting attention, developing documentation supporting favorable characterization, and creating negotiating credibility through demonstrated professionalism.

Systematic Balance Sheet Review

Start with a line-by-line review of every asset account, asking for each: “Does this item represent value that will convert to cash or provide economic benefit that would otherwise require cash outlay?” Any affirmative answer triggers deeper analysis.

Realistic Time Investment: Based on our experience, expect this review to require 8-15 hours of owner and CFO time for businesses with moderate balance sheet complexity (typically defined as 2-3 locations, 5-10 significant vendor contracts, and standard insurance arrangements). Businesses with multiple locations, significant contracts, or unusual balance sheet items may require 20-30 hours. Very simple balance sheets may require only 3-5 hours, though the optimization potential in these cases is correspondingly limited.

Create a comprehensive schedule listing each potential cash-like item, its current balance, expected conversion or benefit period, and initial characterization argument. This schedule becomes your negotiating reference document and demonstrates the thorough approach buyers respect.

Documentation Development

For each identified item, gather supporting documentation that substantiates your characterization argument:

• Prepaid expenses: Contracts or invoices showing payment terms and benefit periods
• Deposits: Agreements specifying recovery terms and conditions
• Tax items: Calculations, filed returns, and any correspondence supporting refund expectations

Strong documentation transforms characterization discussions from subjective debates into fact-based negotiations. When you can show precisely when a deposit will be returned and under what conditions, buyer resistance typically softens. Though it rarely disappears entirely.

Historical Pattern Analysis

Examine how these items have behaved historically. If prepaid insurance balances fluctuate seasonally, document the pattern and explain where current balances fall relative to normal cycles. If deposits have been recovered consistently upon contract completion, demonstrate that recovery pattern.

Historical patterns support cash-like arguments by showing actual behavior matches theoretical characterization. But be prepared for buyers to argue that historical patterns don’t guarantee future outcomes, particularly for deposits contingent on lease renewals or vendor relationships. This counterargument has merit, and acknowledging it while emphasizing historical consistency demonstrates negotiating sophistication.

Negotiation Strategies and Realistic Expectations

With thorough preparation complete, sellers can approach cash-like item negotiations strategically while maintaining realistic expectations about outcomes.

Define Cash Broadly in Initial Drafts

If you’re providing the initial draft of the purchase agreement or commenting on the buyer’s draft, push for broad cash definitions that explicitly include identified cash-like items. Rather than accepting a generic definition of “cash and cash equivalents,” propose language that specifically enumerates prepaid expenses meeting certain criteria, deposits recoverable within specified timeframes, and other identified items.

Explicit enumeration forces direct negotiation over each item rather than allowing buyers to exclude items through vague definitional language. Even if you don’t prevail on every item, you’ll likely retain more than under a generic definition the buyer interprets narrowly.

Understand the Negotiation Dynamic

Cash-like item negotiations rarely occur in isolation. Sophisticated buyers view the entire deal as an interconnected whole, and concessions on cash-like items may affect flexibility elsewhere. Before investing significant negotiating capital in characterization battles, consider:

• How important are these items relative to other open negotiation points?
• What is the buyer’s likely response to aggressive cash-like positions?
• Where might the buyer seek offsetting value if they concede on characterization?
• Does the buyer seem focused on total deal economics or specific line items?
• How sophisticated is this buyer in understanding balance sheet mechanics?

Reading buyer sophistication proves critical. First-time acquirers may accept reasonable cash-like characterizations without offsetting adjustments. Experienced private equity buyers will likely seek equivalent value elsewhere if they concede characterization points.

Common Buyer Counterarguments

Buyers raise predictable objections to cash-like treatment. Preparing responses strengthens your position, though these responses rarely prove dispositive:

“These items are operational working capital.” Response: Distinguish between items needed for ongoing operations at normalized levels and excess balances resulting from timing decisions. Acknowledge that some prepaid balance is operational, but argue that amounts exceeding normalized levels represent cash-like value.

“Working capital will capture the value.” Response: Cash treatment provides certainty. Working capital treatment introduces contingency through targets and collars. Note that this argument is strongest when the transaction uses a collar mechanism that might absorb variations without adjustment.

“We need these items to operate.” Response: Need and payment are separate concepts. The buyer needs insurance coverage, but the seller already paid for that coverage and deserves compensation for cash deployed. Both propositions can be true simultaneously.

The Risk of Overaggression

Aggressive characterization positions carry risks that sellers sometimes underestimate:

• Relationship damage: Buyers may view overreach on cash-like items as indicative of broader negotiation unreasonableness. In competitive sale processes, we estimate this dynamic affects 20-30% of transactions where sellers push aggressively on marginal items.
• Time consumption: Extended debates over characterization consume deal timeline and attention that might be better allocated to higher-stakes issues.
• Offsetting adjustments: Sophisticated buyers may concede characterization while adjusting working capital targets or other terms to achieve equivalent economics. The net result: more complexity without more proceeds.
• Deal fatigue: Marginal battles can contribute to overall negotiation exhaustion that affects more important terms later in the process.

When Cash-Like Item Negotiations Backfire: We have observed situations where aggressive cash-like item positions damaged deals. In one case, a seller’s insistence on cash-like treatment for a marginal tax refund claim created sufficient friction that the buyer walked away from flexibility on an earnout structure worth significantly more. In another, repeated characterization disputes led a strategic buyer to question whether the seller would be cooperative during the transition period, resulting in more restrictive transition terms. These cautionary examples remind sellers that negotiation success requires calibrating intensity to stakes and reading counterparty dynamics accurately.

The most successful sellers calibrate their intensity to the dollars at stake, the strength of their arguments, and the overall deal dynamic. They prioritize items with strong characterization arguments and meaningful balances while accepting unfavorable treatment on marginal items to preserve relationship capital.

Industry-Specific Considerations

Cash-like item composition and negotiation dynamics vary significantly across industries. Understanding these patterns helps sellers calibrate expectations and focus preparation efforts.

Manufacturing and Distribution: These businesses typically offer the highest cash-like item potential due to substantial prepaid insurance, equipment deposits, facility security deposits, utility bonds, and sometimes customs bonds for importers. In our experience, manufacturing businesses often show potential cash-like items representing 1-3% of enterprise value. Working capital mechanics are well-understood by buyers in this space, and cash-like item negotiations follow relatively predictable patterns.

Professional Services: Balance sheets tend to be asset-light, limiting cash-like item potential. Potential cash-like items typically represent less than 0.5% of enterprise value in our experience. But retainer arrangements, prepaid professional liability insurance, and trust account balances (for certain professions) may warrant analysis. Buyers in this sector often focus more on working capital dynamics around receivables and work-in-progress than on traditional cash-like items.

Technology and Software: Prepaid hosting costs, software development tools, and annual license prepayments may represent cash-like value, though amounts are often modest relative to deal sizes. SaaS businesses with deferred revenue dynamics face complex working capital negotiations where cash-like item discussions become secondary. Optimization potential is typically limited unless the business has significant infrastructure deposits.

Construction and Contracting: Performance bonds, bid bonds, and retainage receivables create unique cash-like item opportunities and complexities. Buyers in this sector typically have sophisticated understanding of these instruments and may resist favorable treatment absent strong documentation. But for businesses with substantial bonding programs, the potential can be meaningful.

Healthcare Services: Malpractice insurance prepayments, credentialing deposits, and certain regulatory deposits may qualify for cash-like treatment. But healthcare transactions often involve complex regulatory considerations that overshadow cash-like item negotiations.

Actionable Takeaways

To maximize value through cash-like item recognition while maintaining appropriate perspective, implement these specific actions:

Assess your optimization potential honestly before investing significant effort. Review your balance sheet to estimate total potential cash-like items. If the amount is less than 0.5% of expected enterprise value, consider whether the effort and advisory costs (typically $10,000-$30,000 for thorough analysis) justify the potential return.

Conduct a comprehensive balance sheet review at least six months before anticipated transaction timing if optimization appears worthwhile. Identify every asset that might qualify for cash-like treatment and document supporting facts. Allow 8-30 hours depending on balance sheet complexity.

Build your documentation file with contracts, invoices, and calculations supporting each item’s characterization. Organize these materials for easy reference during negotiations. Strong documentation significantly improves success rates.

Engage your M&A accountant early to review your analysis and strengthen arguments. Their experience identifying overlooked items and refining characterization positions adds meaningful value. Budget 10-20 hours of their time for this analysis.

Draft proposed cash definitions that explicitly include your identified items. Having your preferred language ready (even if you’re not providing the first draft) accelerates negotiations and improves outcomes.

Compare cash-like characterization to working capital target negotiation for your specific situation. Sometimes negotiating favorable working capital targets proves more effective than item-by-item characterization battles.

Calibrate your intensity to the dollars at stake, argument strength, buyer sophistication, and overall deal dynamic. Preserve negotiating capital for issues that matter most. Avoid aggressive positions on marginal items.

Prepare for partial success rather than complete victory. Based on patterns we have observed, most negotiations result in acceptance of 50-75% of well-documented cash-like items. Realistic expectations prevent disappointment and suboptimal reactions.

Conclusion

Cash-like item recognition represents one of several opportunities for sellers to optimize their actual proceeds from M&A transactions. While headline purchase prices and multiples attract attention, the mechanical calculations determining final proceeds frequently adjust by meaningful amounts based on characterization decisions that receive insufficient attention from unprepared sellers.

But this opportunity requires honest assessment of potential value, realistic expectations about negotiation outcomes, and appropriate calibration of effort to stakes. Not every seller will benefit significantly from cash-like item optimization, and aggressive approaches can sometimes prove counterproductive, damaging buyer relationships or consuming negotiating capital better deployed elsewhere.

The sellers who benefit most from cash-like item attention share common characteristics: they assess their specific potential objectively before investing preparation resources, prepare thoroughly when optimization appears worthwhile, document extensively to support their positions, and negotiate from informed positions while maintaining perspective on overall deal economics. They understand that cash-like item optimization works best as part of a comprehensive transaction preparation strategy rather than as an isolated tactic.

As you prepare for your eventual exit, include cash-like item analysis in your transaction readiness assessment. Evaluate whether your balance sheet composition offers meaningful optimization potential. If it does, build the inventory early, develop supporting documentation, and engage advisors who understand these mechanics. If it doesn’t, focus your preparation energy on higher-impact areas like working capital target negotiation, earnout structuring, or representation and warranty optimization.

At Exit Ready Advisors, we help business owners navigate these transaction mechanics alongside the larger strategic questions of exit planning. The owners who achieve the best outcomes combine vision about what they want from their exits with realistic assessment of where preparation effort generates meaningful returns. Cash-like item optimization exemplifies this combination for appropriate situations. A technical detail that can translate into enhanced proceeds for sellers whose circumstances warrant the investment.