Deferred revenue — customer payments received before the service is delivered — is typically classified as a current liability in working capital calculations, reducing working capital and therefore reducing the purchase price adjustment in favor of the buyer. SaaS and AI companies often have large deferred revenue balances because customers prepay for annual or multi-year subscriptions. If the working capital definition treats deferred revenue as a liability but the company's cash has already been spent delivering the service, the working capital adjustment creates a windfall for the buyer at the seller's expense.
Deferred revenue is the accounting entry created when a SaaS company receives annual subscription payments in advance. Under GAAP, the unearned portion sits on the balance sheet as a liability — the company owes the customer the service they've paid for. In a standard working capital peg calculation, this liability reduces working capital and can trigger a post-closing adjustment requiring the seller to pay the buyer. But economically, this deferred revenue represents cash already collected that the buyer will retain — it's not a real liability in the sense that the buyer will ever have to pay cash to settle it. Sellers who don't understand this dynamic going into negotiations regularly discover at closing that they owe the buyer a significant working capital shortfall payment, based on an accounting treatment that doesn't reflect economic reality.
AI companies often have large prepaid compute contracts with cloud providers — prepaid expenses that are assets in the working capital calculation. Whether these contracts are included in working capital, treated as long-term assets excluded from the calculation, or classified as debt-like items depends entirely on the working capital definition. Disputes over how to classify prepaid cloud infrastructure contracts are among the most common post-closing adjustment disputes in AI company acquisitions.
AI companies add another layer of complexity to the working capital analysis. Large compute contracts — prepaid cloud credits, multi-year GPU reservation agreements, and data infrastructure commitments — sit on the asset side of the balance sheet but may have limited transferability and significant termination exposure. In 2026, Gurpreet S. Bal has seen AI acquisitions where the working capital analysis requires specific treatment of prepaid compute contracts that don't fit any standard category. Buyers want to exclude non-transferable compute commitments from working capital assets. Sellers argue these commitments represent real value that the buyer is receiving. The resolution requires a specific accounting policy election at signing, not a general reference to GAAP.
Post-closing working capital disputes persist because parties negotiate deal economics intensely but spend insufficient time on the accounting definitions that determine how the closing balance sheet is prepared. When vague definitions are applied to the actual balance sheet by accountants following different interpretations of GAAP, the parties realize they had different assumptions. By then, the deal has closed and neither party has a good alternative to expensive dispute resolution.
As of 2026, working capital disputes in software acquisitions remain among the most common post-closing disagreements that Gurpreet S. Bal encounters. The frequency is a function of drafting habits: parties often negotiate the purchase price in detail while treating the working capital mechanics as a standard exhibit that doesn't require the same attention. The result is that the actual economic adjustment — which can be material relative to the purchase price — is determined by accounting policies that were never explicitly negotiated. Gurpreet S. Bal is direct about the pattern: "I've seen more post-closing disputes about working capital than almost any other deal mechanic." The fix is not complicated: explicit accounting policy elections, a defined treatment for deferred revenue, and a pre-agreed methodology for AI-specific balance sheet items need to be in the purchase agreement, not left to a post-closing true-up process conducted by opposing accountants.
The working capital peg should be set by preparing an illustrative closing balance sheet based on a recent historical period, agreeing on the specific accounting methodology for each line item, and attaching that methodology as an exhibit to the purchase agreement. Both sides should hire their accountants to review the methodology before signing, not after closing. The cost of that analysis before signing is a fraction of the cost of a working capital dispute after closing.
Gurpreet S. Bal recommends a specific process for SaaS and AI acquisitions. Before the LOI, both sides should agree on whether deferred revenue will be included or excluded from the working capital peg, and document that agreement in the LOI. The definition of "working capital" in the purchase agreement should include a specific accounting policies exhibit that governs every balance sheet item that could be treated differently under GAAP — not a general reference to "GAAP applied consistently." The peg amount itself should be established based on a sample closing statement prepared by the seller and reviewed by the buyer's financial team before signing, not a trailing average that may not capture the company's current state. These steps add a week to the negotiation timeline. They eliminate months of post-closing disputes.
Gurpreet S. Bal is a corporate partner with 16 years advising on private equity, merger transactions, and public offerings for companies and investors at three of the world's top law firms. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. For more information and to get in touch, visit gurpreetbal.com.