There’s a moment every PE-backed finance team hits.
The company is growing.
The board wants answers faster.
Investor reporting gets more detailed.
And somehow the numbers still live across spreadsheets, disconnected systems, and a process everyone is quietly afraid to touch.
Finance teams are being asked to operate at a completely different speed than they were even a few years ago—especially as AI reshapes how businesses scale, forecast, and create value.
Private Equity in the AI Age breaks down what that shift actually looks like from inside the finance function:
Why AI-enabled businesses are changing valuation expectations.
How post-deal reporting and operational pressure are evolving.
What investors increasingly expect from modern finance teams.
How leading operators are approaching planning, forecasting, and execution during high-growth periods.
Less theory. More practical insight from people operating in it every day.
Hi, it's CJ Gustafson and welcome to Looking for Leverage.
Today's term: debt-like items. The category on the closing balance sheet the buyer uses to reduce the purchase price by every dollar they can argue belongs in the same bucket as your term loan.
Setting the scene
Late in our sale process, the buyer's team came back with a position that I knew was coming on the categories but didn't see coming on the math. They wanted our deferred revenue balance treated as a debt-like item, which by itself wasn't a surprise. What was a surprise was the next thing they pushed for. They argued that since we ran a 75% gross margin business, the cost to deliver against that deferred revenue was 25% of the balance, so they wanted at least 25% off the price for it.
I had prepared for the categorical fight. I had not prepared for a fight about gross margin economics inside the closing schedule.
The dumb version
Debt-like items are obligations on the balance sheet that aren't formally debt but, the buyer argues, function like debt. The buyer wants the seller to settle them at close, the same way the term loan gets paid off. Every dollar reclassified as debt-like comes off the equity proceeds, dollar for dollar.
This is a closing mechanic, not a tax thing. It runs alongside the working capital peg and the cash sweep. It’s one of the three different adjustments that all hit the price at close. You probably already know that. But it gets really murky.
Making it real
The fight here is never about the term loan. The term loan is on the balance sheet, and outlined clearly in the credit agreement, with a payoff letter from the agent. This one is easy and there’s no argument.
The fight is about the gray-area liabilities that the buyer wants to characterize as debt and the seller wants to characterize as something else (working capital, an operating accrual, a forward obligation that comes with the business).
These are the categories that show up on almost every deal:
Deferred revenue. The buyer says this is cash you collected for services you haven't yet delivered, so the new owner is on the hook to deliver them, so it's debt-like. The seller says it's a normal operating liability that lives in working capital, so it's already captured in the peg. Both sides are right depending on how you frame it.
Customer deposits and prepayments. Same argument as deferred revenue, with a slightly different flavor. Depends on how your business makes money and what it sells. Common in any business that takes payment up front.
Accrued bonuses, commissions, and PTO. Earned by employees pre-close, payable post-close. The buyer argues these are pre-close obligations the new owner shouldn't have to fund. The seller argues they're ordinary-course working capital and would be paid out in the normal cycle anyway.
Unfunded pension obligations. Almost always debt-like. Rarely fought.
Earnouts from prior acquisitions. The Russian doll. You bought a company and still owe the seller earnout payments, the buyer of your company will treat that obligation as debt-like.
Litigation reserves. The buyer wants any reserve for known disputes treated as debt-like. The seller wants them treated as ordinary accruals or pushed into the Reps & Warranties policy.
Tax liabilities. Income taxes payable for the pre-close period are usually debt-like. Sales tax accruals get fought (and usually lost by the seller)
The mechanic that makes this consequential: working capital is settled against a peg.
Try to follow along with me here…
If accrued bonuses are inside working capital, they have to be at the peg level for the price not to move.
If they're pulled out and reclassified as debt-like, the entire balance comes off the price, with no offsetting peg credit.
Pulling an item out of working capital and into the debt-like bucket is worth the full balance, every time.
The math (with numbers)
Let's say you're selling for an $80M enterprise value. The deal team modeled equity proceeds of $62M after debt, fees, and the working capital adjustment.
Starting point:
Enterprise value: $80.0M
Less term loan: ($15.0M)
Less revolver and accrued interest: ($1.5M)
Less transaction expenses: ($1.5M)
Working capital settles at peg: $0
Expected equity proceeds: $62.0M
The buyer's draft net debt schedule adds the following debt-like items:
Deferred revenue: $1.4M
Customer deposits: $0.6M
Accrued bonuses (earned, unpaid): $0.9M
Unfunded PTO: $0.3M
Total disputed debt-like items: $3.2M
If the buyer wins on all of them, equity proceeds drop to $58.8M. That’s a 5.2% haircut on the equity check from a single schedule the seller's reps may not have seen until the night before close (all too common to drop this right before the end).
In a typical negotiation, the seller pushes back hard on deferred revenue and customer deposits (arguing they're working capital), concedes on the bonus accrual, and lands somewhere in the middle. Call it $1.4M of the $3.2M sticks.
Final equity proceeds: $60.6M.
What’s kind of scary is it’s a $1.4M argument, decided by which side has more leverage in the last 72 hours of the deal. The train is already on the tracks and the deal is moving towards a logical conclusion. Who blinks?
When it clicked
I spent the first part of that week building a defense for why deferred revenue shouldn't be debt-like at all. Working capital item, captured in the peg, double-counting if pulled out, here's the precedent from comparable deals. Solid arguments (I thought).
The buyer's deal team didn't really engage with any of it. They listened, said something polite, and came back with the gross margin argument, which moved the conversation from "should this count" to "how much of this counts."
Once that frame was set, every additional minute I spent on the categorical argument was wasted. The new question on the table was whether 25% off was right, or whether we could push it to 15%. I was on my back foot and fighting for scraps.
What I learned: on debt-like items the seller almost never wins the categorical argument. The buyer's deal team has done this fifty times. They know which items will end up in the bucket and which won't. What they negotiate is the magnitude.
What percentage of deferred revenue?
which slice of the bonus accrual?
how much of the litigation reserve?
I also learned the math the buyer reaches for is going to be specific to your business, not generic. A 75% gross margin software-flavored company gets the cost-to-serve argument. A manufacturer gets the open-PO argument: the buyer says your committed but undelivered purchase orders for raw materials and equipment are debt-like at face value, because the new owner is on the hook to take delivery and pay. Your job, weeks before this conversation happens, is to figure out which version is most likely to come at you, and have your counter-math ready.
What to do Monday
Three things, all of them small.
Pull your closing balance sheet (or your most recent month-end if a sale is on the horizon) and circle every line that could be argued as debt-like. Deferred revenue, customer deposits, accrued bonuses, contingent purchase price obligations, litigation reserves, tax accruals. You don't need to win the argument now. You need to know what the disputed pile looks like before the buyer's QofE provider builds their first net debt schedule.
Read the "indebtedness" definition in your existing credit agreement. It's a defined term and it usually has a "debt-like" flavor of its own. The categories your current lender treats as indebtedness are a reasonable starting point for predicting which categories the next buyer's deal team will go after.
If a sale is actually in scope, ask your sell-side advisor to put a draft net debt schedule in front of you 60 days before launch, not 60 hours before signing. The advisor will reflexively say "we'll handle it." Push back. The schedule is the document where the price actually moves, and the CFO is the only person on the seller side who can defend the operating-vs-debt framing of every line.
Wishing you a closing balance sheet where the only thing called debt is debt,
CJ
Looking for Leverage breaks down one PE term, clause, or mechanic each week, written for the CFOs and finance leaders who actually have to live with these things. If this got forwarded to you, subscribe at lookingforleverage.com. If there's a term you want broken down, reply and tell me. I read everything.
Thanks for reading, and make sure to check out our sponsor, Abacum.
Download the 2026 Finance Guide: Lessons from the Trenches to get the tactical frameworks used by top PE-backed leader for FREE.