Net Debt Adjustment

A buyer and seller agree that a business is worth $20 million before considering its financing. At the chosen measurement date it has $7 million of qualifying debt and $2 million of qualifying cash, so a simple equity bridge gives $15 million before any other adjustments.

The arithmetic is enterprise value minus debt plus cash. The share purchase agreement should define debt, cash and any debt-like items, since a bank loan is usually easier to identify than an unpaid bonus, lease liability, customer deposit or tax exposure.

Some items can be treated differently in different deals: deferred revenue may be viewed as a working-capital item, a debt-like obligation or handled through a special adjustment, so do not assume one universal answer or count the same liability twice. Cash may not all be usable either, as restricted deposits, cash in an entity that cannot transfer funds readily or balances needed for regulatory capital may be excluded or adjusted.

Working capital often has a separate adjustment against a target or peg, where receivables, inventory and ordinary payables may affect it, and definitions must prevent a payable from being deducted as debt and again through working capital. PwC explains that a closing statement commonly calculates final price using agreed cash, indebtedness, working capital and seller expenses, while EY contrasts completion accounts with locked-box mechanisms.

These descriptions show why a headline valuation cannot settle the equity cheque alone. Under completion accounts, an estimated price may be paid at closing and then trued up when the closing balances are prepared and reviewed.

A locked box usually sets a price using an earlier agreed balance sheet and protects against value leaking out before completion, and it generally does not work by the same post-closing net debt true-up, so claims about leakage or permitted payments are governed by that deal's terms. The measurement date matters too, because a loan drawn down one day before completion, the collection of a large receivable or the payment of tax can change net debt, and the agreement may restrict actions designed only to shift the price without changing underlying value.

The seller should prepare a debt-like items schedule during due diligence, including known liabilities and explaining disputed classifications early, since a last-minute discovery can delay closing or turn into a claim after completion, and bank statements, reconciliations and restrictions can matter. Not all deals are cash-free, debt-free in a literal sense, because the buyer may assume agreed financing or leave some cash in the target, and "cash-free, debt-free" describes a pricing basis that must be translated into detailed mechanics.

Illustratively, enterprise value of $20 million less $7 million debt plus $2 million cash equals $15 million, and if working capital is $1 million below the agreed peg and the documents require a full downward adjustment, the price becomes $14 million, though that second adjustment should not be applied without the actual agreement. Tax liabilities can be contentious, as current tax payable might be treated as debt-like in one deal or reflected elsewhere in another, and VAT, payroll obligations and uncertain tax exposures need careful definitions to avoid overlap with ordinary operations.

Transaction costs can also reduce proceeds if the seller agreed to bear them, but they should not be silently inserted into net debt if the contract handles them separately, and a dispute process helps when closing accounts arrive after control has passed to the buyer by defining access to records, objection periods and an independent accountant's scope. For an owner considering a sale, request a draft equity bridge early, because a strong enterprise value can still yield a much smaller equity price, and negotiate definitions with advisers before signing, not after the cash calculation surprises you.