Net debt (cash-free debt-free)

Definition

The cash-free debt-free convention makes M&A negotiations comparable across businesses with different balance-sheet positions. Two businesses with identical €15m revenue and €2m EBITDA can carry very different equity values depending on how much cash and debt sits on the balance. By first negotiating price on enterprise value (EV): what the business is worth operationally: and then subtracting net debt, both parties get a clean sequence: first agree what the business is worth, then settle what the acquired company brings in capital structure.

Benelux practice fixes the following framework. "Cash" is liquid or near-liquid resources: bank accounts, petty cash, money-market investments under 90-day tenor. "Debt" is every financial obligation: bank loan, mezzanine, lease obligations (operating leases since IFRS 16 are often included), shareholder loan, deferred consideration to a prior seller, and: critically: every "debt-like item": position that's not a formal loan but economically pulls cash out of the business. That last category is where 70% of net-debt negotiation discussions cluster.

Typical "debt-like items" we see in every Benelux M&A deal: outstanding dividends above normal levels, one-off bonus commitments not yet paid out, tax liabilities for past years (VAT, social security, corporate tax), pension obligations underfunded versus PBO (Projected Benefit Obligation), blocked accounts and escrows to third parties, transaction costs carried by the business instead of the seller, large intercompany receivables from related parties unlikely to be collected quickly. For industrial businesses add: environmental obligations for future remediation, contingent claim exposures (pending legal disputes), and potentially underfunded warranty obligations.

The settlement works as follows: enterprise value (agreed multiple × normalised EBITDA, e.g. 5x × €2m = €10m) minus net debt (€500k cash − €1.2m bank debt − €300k debt-like items = −€1m) yields equity value €11m. Important nuance: cash above a "normal level" (typically the 12-month average required for operations) counts as "excess cash" and accrues to the seller at closing; "trapped cash" (cash not freely distributable due to tax or regulatory constraints) counts for half or not at all. These all must be made explicit in the SPA net-debt definition.

Worked example

A Utrecht IT-services business was sold at 5.8x EBITDA. Normalised EBITDA €1.65m → enterprise value €9.57m. On closing balance: cash €420k (of which €120k working-capital buffer, so €300k "excess cash"), bank loan €780k, IFRS 16 lease obligations €310k, outstanding dividends above normal level €180k, a pending legal dispute with €90k liability estimate (50% weighting after negotiation = €45k debt-like). Net debt = −300k + 780k + 310k + 180k + 45k = €1.015m. Equity value = €9.57m − €1.015m = €8.555m. Seller received €8.555m at closing (minus any escrow). The negotiation over legal-dispute weighting (full debt, half debt, or none) cost 3 weeks and €25k of legal hours: typical for net-debt disputes in this price band.

When it matters

In every share purchase above €1m EV. The definition of "debt-like items" in the SPA determines the difference between 5 and 15% of the final sale price on an average Benelux mid-market deal. Don't negotiate this as an afterthought during SPA drafting but as a core point in the LOI or early SPA phase. Three items that must be explicit in every Benelux SPA: (1) definition of "trapped cash" and how much counts as cash, (2) whether IFRS 16 lease obligations count as debt (often depends on whether the buyer reports IFRS or BE-GAAP), (3) treatment of pending legal-dispute exposures (full, half, or none).

Frequently asked

What all counts as "debt-like item" beyond formal bank debt?

Outstanding dividends above normal levels, unpaid bonuses, past-year tax liabilities (VAT, social security, corporate tax), pension obligations under PBO funding, third-party escrows, transaction costs on the company account, intercompany receivables from related parties, and: for industrial businesses: environmental obligations and pending legal exposures. Negotiate item by item in the SPA definition.

Do IFRS 16 lease obligations count as debt?

Depends on the SPA definition and the buyer's reporting regime. PE acquirers reporting IFRS typically include them; strategic buyers reporting BE-GAAP often don't. Negotiate this explicitly: for asset-heavy businesses the difference can be €500k to €2m in final price.

What is "excess cash" and who gets it at closing?

Excess cash = cash above the normal working-capital buffer (typically the 12-month average of operational buffer). It doesn't count as a debt deduction but accrues to the seller at closing. For a business with €800k cash of which €200k is operational buffer: €600k excess cash for the seller. Negotiate the "normal level" carefully in the SPA.

How does net debt differ between locked box and completion accounts?

Locked box: net debt on reference date (typically 12 months pre-closing), fixed. No post-closing adjustment. Completion accounts: net debt measured at closing, compared to estimated basis, difference cash-settled post-closing. Locked box works for stable businesses; completion accounts gives a fairer outcome for cyclical or fast-moving balances.