The parties first negotiate an enterprise value on a cash-free, debt-free basis. At the reference date, the actual financial debt is then deducted and the freely available cash added. This way, the buyer does not pay twice for cash, and the seller does not remain liable for loans it took out itself.
For sellers of mid-sized companies, the point of contention usually lies in the definitions. Buyers want to classify as many items as possible as debt, such as tax provisions, customer prepayments or outstanding bonuses. At the same time, they do not count cash needed for day-to-day operations as free cash. Every classification shifts the purchase price euro for euro.
It is common to combine this with a target value for net working capital. Without this target, the seller could increase cash by collecting receivables and paying suppliers later. The exact definitions are set out in the purchase agreement and prepared through financial due diligence.
Example
Hypothetical example: An enterprise value of €10.0 million is agreed. The company has €3.0 million in bank loans and €1.2 million in free cash. The purchase price for the shares is therefore €8.2 million.
Debt vs. free cash (typical classification)
| Item | Usually treated as debt | Usually treated as cash |
|---|---|---|
| Bank loans | Yes | No |
| Pension provisions | Often, negotiable | No |
| Bank balances | No | Yes, if freely available |
| Minimum operating cash | No | Often excluded |
Sources
- M&A Vocabulary: Experten verstehen „Cash Free & Debt Free“, Rödl & Partner
- Kaufpreisfindung beim Unternehmensverkauf, Rödl & Partner