“Cash & Debt Free” means that a business acquisition is priced as if the company were free of cash and debt: the seller retains the available cash and remains responsible for the debt. The “equity bridge” calculates the final share value based on this enterprise value by adding cash and cash-like items and subtracting debt, debt-like items, and working capital adjustments.
The concept of “Cash & Debt Free” is one of the most common terms used in negotiations during a business transfer. But what exactly does this term mean?
What does “Cash & Debt Free” mean?
Literally, “Cash & Debt Free” means that the company has no cash on hand and no debt. This means that on the economic acquisition date, the seller is entitled to the cash on hand within the company, and all existing debts are the seller’s responsibility.
In such cases, the available cash and debts are added to or subtracted from de ondernemingswaarde on an “off-balance-sheet” basis to determine the final purchase price or share value (the “equity bridge”). Buyers typically make an offer based on “Cash & Debt Free”; this means that the seller (usually) does not actually receive the stated amount.
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How is the equity value determined (the “equity bridge”)?
In practice, the purchase price of shares is often determined based on the sum of:
- De ondernemingswaarde (based on the future operating earning capacity of the company);
- +/+ Available cash and “cash-like items” (cash equivalents);
- -/- Outstanding debts as well as “debt-like items”;
- +/- Other adjustments agreed between the parties (for example, a surplus or deficit in working capital or non-operating assets).
If the balance sheet of the company being sold includes receivables from or liabilities to the shareholder, we always recommend specifying in the letter of intent the amount that the seller will actually receive through the transaction. If there is a significant amount of cash on hand, the transaction can be “lightened” through a pre-closing dividend.
What is de ondernemingswaarde?
De ondernemingswaarde refers to the value of a company’s future operations, without taking its financing structure into account. This is also known as operational value. There are various methods for calculating de ondernemingswaarde . Valuation methods based on cash flows and multiples are very common in M&A practice (including for small and medium-sized businesses!).
Cash flow-based valuation methods include, for example, the “Discounted Cash Flow” method and the “Adjusted Present Value method. In addition, when determining de ondernemingswaarde based on multiples,“EBITDA multiples” and “EBIT multiples” are often used. This is because EBITDA and EBIT are profitability indicators that are not influenced by a company’s financing structure and are therefore well-suited for determining de ondernemingswaarde . The results of the aforementioned methods are often compared with one another (“sanity check”).
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What is a working capital surplus or deficit?
On the economic acquisition date, there may be a so-called surplus or shortfall in working capital. If there is a surplus or shortfall in working capital, this results in a positive or negative adjustment to de ondernemingswaarde. The surplus or shortfall in working capital is determined by comparing the working capital on hand as of the economic acquisition date to the so-called “normal” level of working capital.
In practice, the normal working capital level is calculated by assessing the average level of the various working capital positions over the past 12 months based on the company’s financial records.
Why is this a common topic of discussion?
During negotiations, discussions may arise between the buyer and seller regarding the interpretation and application of the “Cash & Debt Free” principle. The adjustments to be applied regarding cash-like and debt-like items, as well as the working capital deficit or surplus, are a common point of discussion during negotiations as part of the “equity bridge,” partly due to the arbitrary nature of some items.
Therefore, it is important to be prepared for these discussions properly and timely, as such adjustments can have a substantial impact on the final purchase price to be received/paid.
Tip
We recommend working out the “Cash & Debt Free” calculation and the “equity bridge” (pro forma) in detail and including them in the letter of intent so that the parties have reached agreement on the main terms of the transaction (including the equity bridge). This approach usually prevents unexpected (detailed) discussions when drafting the final transaction documents.
Frequently Asked Questions About “Cash & Debt Free” and the “Equity Bridge”
What does “Cash & Debt Free” mean in the context of a business acquisition?
It means that the purchase price is based on a company with no cash and no debt: the seller retains the cash on hand as of the acquisition date and remains responsible for any existing debt.
What is an “equity bridge”?
The equity bridge is the calculation used to determine the final share value (purchase price) based on de ondernemingswaarde : enterprise value plus cash and cash equivalents, minus debt and debt equivalents, plus or minus agreed-upon adjustments such as a working capital surplus or deficit.
What is de ondernemingswaarde?
De ondernemingswaarde is the value of a company’s future operations, without taking its financing structure into account. It is often calculated using cash flow methods (such as Discounted Cash Flow) or through EBITDA and EBIT multiples.
What is a working capital surplus or deficit?
A working capital surplus or deficit arises when the working capital on hand as of the economic acquisition date differs from the normal working capital level, which is typically determined based on the average over the past 12 months. This results in a positive or negative adjustment to the purchase price.
Why does the “Cash & Debt Free” calculation often lead to debate?
Because the adjustments for cash-like items, debt-like items, and the working capital surplus or deficit are partly arbitrary, they often lead to discussions between the buyer and seller. These adjustments can have a substantial impact on the final purchase price, so thorough preparation is essential.
