What does "debt and cash free" mean in acquisitions?

Literally translated, debt and cash free means "Free of debts and liquid assets." In practice, all businesses typically have some amount in their bank account and possibly an outstanding debt at the time of the transfer date. With this term, parties indicate that there will be a detailed settlement of liquid assets and/or debts when determining the final acquisition price for the shares.

The debt and cash free price is the base price. Often based on a multiple of the *EBITDA: earnings before interest, taxes, depreciation, and amortization.

Example 5x EBITDA

The transfer price can be calculated as 5 x EBITDA.

Add the available cash at the time of transfer, subtract the outstanding bank debts at that moment, and the result is the final acquisition price.

It seems like a straightforward calculation.

Yet, debt and cash free can lead to discussions during acquisitions.

There are actually different definitions for these terms. These discussions can affect the acquisition price to be paid.

What is cash? And what is debt?

Cash = surplus money

Debt = interest-bearing debts

Example: a company has a positive cash balance of € 1 million on the acquisition date and no interest-bearing debts.

However, there is a significant balance of overdue suppliers for more than 90 days. Normal payment terms in the industry range between 30 and 60 days. As a result, the balance of suppliers in this case will still be partially considered as ‘debt’.

This is just an example to show that debt and cash are not always clear-cut terms. Debt and cash free is also often linked to a 'normal' net working capital. Sometimes, Debt-like items that are not strictly interest-bearing debts are still considered as debt.

All these can lead to discussions that often arise only at the end, after the due diligence investigation.

Do you want to make an offer for the shares of a company? If you do not yet have sufficient knowledge about the exact liquidity or debt position of that company, base your offer on the debt and cash free value. It is important to provide clarity about your assumptions on this matter in the terms of your offer.