Deferred Revenue - NWC peg
Hi, my firm is looking to acquire a SAaS company that has a high deferred revenue balance (20-30%) of revenues. One of the principals mentioned that we will have to decide later whether to treat it like debt or working capital adjustment. I have browsed many topics about the treatment of deferred revenue as it relates to SPA Negotiation, but I am still confused.
For simplicity, assume the business has AR of 2000, AP of 1000, and Deferred Revenue of 5000. Can someone please, please answer the following questions for me:
regardless of Whether DR is treated like debt or working capital, how does it matter for the seller? Won't he still receive the same amount of proceeds?
if classified as working capital, then the working capital balance will be really negative. What do you do in this case? How do you structure the SPA? Let's say that all the last 3-6-12 month average balances of WC are all negative and deferred revenue is a consistent part of the business model
I would really appreciate if someone can share a quick example with me as I am really really frustrated by all the readings on this topic (DR treatment). Mother f***king accounting and law firms who've published shit on this just jump around the question
I AM SUPER SUPER CONFUSED