A founder closed a sale to a strategic buyer last fall. The headline number in the press release was $48 million. The wire that hit his bank account on closing day was $39.2 million. The difference was not the working-capital adjustment, which everybody had been tracking for months. It was the “indebtedness” deduction, which the founder had assumed was the line on the balance sheet that said “long-term debt” and which his banker had told him was zero because the business had no outstanding loans.
The line on the balance sheet that said “long-term debt” was indeed zero. The “indebtedness” definition in the purchase agreement, however, was three paragraphs long. It pulled in the company’s deferred revenue from annual customer prepayments (about $3.2 million), the capitalized lease on the warehouse equipment (about $1.4 million), the unpaid portion of a sales-team bonus accrual that the buyer’s accountant had decided was “debt-like” rather than ordinary current-period compensation (about $2.1 million), and the unfunded portion of the deal’s transaction bonus pool that the founder had committed to his team but had not yet paid (about $2.1 million). The total was $8.8 million. The founder’s wire was nine million dollars below what he had been telling his spouse for the last six months.
The founder told me afterward that he had read the purchase agreement, had read the indebtedness definition, and had not understood that it would do what it did. His advisors had not flagged the items as material because, at signing, the items had not been quantified — they were defined categorically and would be measured at closing against the actual balance sheet. The mechanics worked exactly as drafted. The founder simply had not modeled what the drafting meant in dollars.
This is the most common surprise I see in private-company sales, and it is almost entirely a drafting and modeling problem rather than a substantive disagreement between the parties. The fix is at the LOI stage. Founders who do not do the work at that stage are signing a wire amount they will not see until closing day.
What “indebtedness” actually means in a purchase agreement
The “indebtedness” definition in a typical 2026 private-target purchase agreement does not mean what an accountant would call indebtedness on the balance sheet. It is a defined term — typically about half a page to a full page long — that lists what counts as debt-like for purposes of the closing-date purchase-price adjustment. The drafting universally includes the obvious categories: bank debt, notes payable, bonds, intercompany loans (if any survive the deal). It often includes capitalized lease obligations, which are debt-like in form even where the company treats them as operating items.
The drafting also includes a series of categories that are economically debt-like but that operating businesses do not always think of as debt. Accrued but unpaid interest on items that count as indebtedness. Prepayment penalties, breakage costs, and “make-whole” amounts that become payable as a result of the transaction. Letters of credit issued and outstanding. Hedge or swap liabilities. The unfunded portion of any pension plan or non-qualified deferred-compensation arrangement. Deferred purchase price from prior acquisitions that the company itself has done.
The categories that surprise founders most, in my experience, are these. First, customer prepayments and deferred revenue, where the buyer treats the obligation to deliver the prepaid service or product as a debt-like obligation. Second, transaction bonuses and retention payments to the founder’s team, where the buyer treats the unpaid portion as debt-like rather than as part of the operating cost base. Third, accrued compensation items — bonus pools earned but not paid, vacation accruals above a normal level, certain commission accruals — where the buyer’s accountant takes a position on what is “above a normal level” that the founder’s accountant has never taken. Fourth, change-of-control payments triggered by the deal itself, including severance to terminated employees, parachute payments to executives, and lender fees triggered by the transaction.
The mechanic that hides the surprise
The reason these items surprise founders is not that the drafting is hidden. The drafting is in the agreement, often in a section labeled “Indebtedness” in capital letters with a defined-term marker. The reason the items surprise founders is that the drafting is categorical at signing, and the dollar quantification only happens at closing, when the buyer’s accountant reads the balance sheet against the agreement’s categories.
A signed agreement that defines indebtedness to include “all obligations of the Company in respect of deferred revenue from customers” looks innocuous if you do not know what the deferred-revenue line item looks like on the actual balance sheet. Three months later, when the closing balance sheet is delivered, the deferred-revenue line is $3.2 million, the buyer applies the definition, and the wire drops by $3.2 million. The founder’s first reaction is that the buyer is being unreasonable. The buyer’s response is that the buyer is reading the agreement.
The same pattern repeats across each of the categories above. The agreement is read literally at closing. The categories that were quantified at signing get verified; the categories that were defined but not quantified get measured and deducted.
What to do at the LOI
The LOI is where the wire arithmetic gets fixed. The LOI typically frames the deal in equity-value terms (“$48 million for one hundred percent of the equity”) and then references “customary adjustments for indebtedness, transaction expenses, and working capital.” That phrase is doing a lot of work, and the seller’s lawyer should refuse to let it sit unspecified.
The clean way to handle this at the LOI stage is to attach a one-page “wire schedule” that walks through how the equity value will be converted to the cash wire on closing day. The schedule should list every category that will be deducted, the dollar estimate as of the most recent balance sheet, and the mechanism for measuring the actual amount at closing. The categories should match the categories the definitive agreement’s “Indebtedness” definition will ultimately contain. The seller-friendly versus buyer-friendly tension in these definitions is real, but the bigger problem is unilateral surprise — and the wire schedule eliminates that by forcing both parties to agree, at the LOI stage, what they think the closing wire is going to be.
Three categories deserve particular attention.
First, deferred revenue and customer prepayments. The buyer’s economic argument for treating these as debt-like is that the company has received cash for services not yet delivered, and the obligation to deliver those services reduces the value of the business the buyer is acquiring. The seller’s economic argument is that the cash is in the bank and the operating cost of delivering the services is reflected in the buyer’s go-forward margin assumptions, so deducting again at closing is double-counting. Both arguments are defensible. The negotiation can land in many places. What it should not do is sit undefined at LOI and produce a surprise at closing. A common landing place is to deduct deferred revenue only to the extent it exceeds the prior-year run rate, or only the portion above an agreed threshold.
Second, transaction bonuses and retention payments. These are paid by the seller out of deal proceeds — they reduce what the founder takes home regardless. The question for the indebtedness definition is whether the unpaid portion of these obligations counts toward the deduction. The cleanest construction is to treat all transaction-related payments as transaction expenses (a separate deduction with its own definition) rather than as indebtedness, with the founder’s gross proceeds reduced by the agreed pool and the buyer treating none of it as a debt-like obligation it is assuming. The reason this matters is that “indebtedness” definitions sometimes include gross-up provisions for taxes that “transaction expenses” definitions do not, and the gross-up math can reduce the wire by a meaningful additional amount.
Third, change-of-control payments to lenders, executives, and other counterparties. These are triggered by the deal itself. The seller bears them economically regardless. The drafting question is whether they appear in the indebtedness deduction (and thus reduce the wire) or are treated as a separate closing-date payment that the buyer makes on the seller’s behalf at closing. The two paths produce the same economic result for the seller, but they look different in the wire schedule and they affect how the deal is described in the press release. The founder who has been telling his team the deal is for $48 million is going to find it harder to explain the $39.2 million wire if the difference includes $4 million of payments that are economically benefits to other people, not deductions against value the founder is receiving.
What the modeling should look like
The wire schedule should be in dollars, on a single page, with the categories named and the assumptions stated. The schedule should be redone at the most recent month-end balance sheet before signing, redone again at the signing-date balance sheet, and redone a final time at the closing-date balance sheet. Each version produces a wire number. The founder should know all three numbers and should understand which differences are arithmetic (the balance sheet moved) and which are interpretive (the buyer is taking a position on a category the founder did not anticipate).
The interpretive differences are the ones to fight about. The arithmetic differences usually take care of themselves. The fight at the LOI stage is to nail down the interpretation — to convert the agreement’s categorical drafting into a quantified wire schedule — so that the only differences between signing and closing are the arithmetic ones. The M&A practice we run produces the wire schedule as a deliverable for every sell-side engagement, because the founders who get to closing without one are the founders who get the surprise.
The buyer-side reality
From the buyer’s side, the categorical drafting of “indebtedness” is not adversarial; it is conservative. The buyer’s deal team does not know, at the LOI stage, exactly what the closing balance sheet will look like. The categorical drafting preserves the buyer’s right to deduct items that turn out to be material without having to renegotiate the agreement. Buyers who agree to a fixed-dollar wire deduction at the LOI stage are taking on risk that the seller’s accounting will surprise them in the wrong direction.
The right deal structure is a hybrid. The wire schedule should fix the dollar treatment of the categories the parties have visibility on at the LOI stage. The categories with genuine measurement uncertainty (working capital, certain accruals) should be defined categorically with measurement mechanics, the same way they are today. The categories the founder is being asked to take on faith — customer prepayments, retention pools, change-of-control payments — should be either quantified at the LOI or moved out of the indebtedness deduction into a different mechanic. That trade is fair to both sides, and the founders who insist on it close deals where the wire matches the expectation.
The headline price is the number that goes in the press release. The wire is the number that goes in the bank account. The gap between them is the indebtedness definition, and the gap is bigger than founders realize unless they do the work at the LOI to close it.
If you are a founder negotiating an LOI or running diligence on a draft purchase agreement and want to understand what your closing wire will actually look like, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
