Net working capital and deferred revenue, SaaS Deal.
Hey all, we are closing on a SaaS acquisition and one of the key sticking points in the PA is regarding working capital as it relates to deferred revenue.
Targetco bills 100% of revenue upfront on a cash basis, they do not book it as deferred revenue.
When we pushed back on the owner he argues that the cost to deliver the service is simply server costs, some maintenance, but he should be able to keep any revenue booked prior to closing.
To calculate what could be considered deferred revenue we broke everything out into MRR, subtracted CaC and Sales. The owner is claiming that all development done prior should be considered in the cost as well, and we should accept that any revenue collected prior to purchase goes to the sellers.
When looking at the timing, revenue is quite lumpy. Their biggest month is October (Last month of course!) which makes up about 14% of sales. Some months they lose money, some moneys they make money.
Refunds are about 1% or revenue so that isn't a risk. There is some service revenue which certainly should be considered, however we are talking about almost 30% of ARR currently sitting in what should be deferred revenue.
We think this should be adjusted from the WC peg, and should impact the purchase price. Original WC peg we set was 100k.
Any experienced SaaS PE buyers that have tackled this issue? How should we argue a change in purchase price, or change in WC here?