Net Debt
Total interest-bearing debt minus cash and cash equivalents — calculated at closing in cash-free, debt-free deals to determine how much of the enterprise value flows to the seller after debt is paid off.
Full Definition
Net debt is the bridge between enterprise value and equity value. If enterprise value is what a buyer is paying for the business, net debt adjusts that to account for the actual capital structure at closing. Formula: Net Debt = Total Debt − Cash and Cash Equivalents. If the business has $3M of bank debt and $800K of cash, net debt is $2.2M. On a $20M enterprise value deal, equity value (net proceeds to seller before working capital adjustments) is $17.8M.
How it actually works: In a typical cash-free, debt-free deal, at closing: (1) the buyer pays enterprise value; (2) the seller's outstanding debt is paid off from the proceeds; (3) the seller sweeps cash to themselves; (4) working capital adjustment applies if applicable; (5) net cash to seller equals enterprise value minus debt, plus cash swept, plus/minus WC adjustment, minus escrow.
What counts as "debt" is heavily negotiated. Clear debt: bank loans, lines of credit, notes payable, capital lease obligations. "Debt-like items" are the negotiation zone: deferred compensation, customer prepayments for undelivered services, accrued bonuses, unfunded pensions, earnouts owed from prior deals, off-balance-sheet obligations. Each item can be characterized as debt, working capital, or neither — and each characterization is worth real purchase price dollars.
Cash and cash equivalents typically include: operating cash, short-term investments, money market funds. Normally excluded: restricted cash (lock-boxes), customer deposits that must be returned, minimum operational float needed for the business to operate post-close.
Seller vs. Buyer Perspective
Every dollar of debt you pay off at closing reduces your proceeds by the same amount. Every dollar of cash you sweep increases proceeds dollar-for-dollar. Before closing: (1) pay down revolving credit to minimize debt balance; (2) manage working capital to free up cash without below-peg shortfalls; (3) understand what's being deducted as "debt-like" — push back on items that are really working capital; (4) sweep cash appropriately at closing. Common debt-like items buyers try to pile on: accrued bonuses, customer deposits, deferred rent, unfunded obligations. Each one is money off your price; negotiate carefully in the LOI when you have leverage.
Define "debt" and "debt-like items" specifically and broadly in the LOI. Examples to include: all bank debt, capital leases, deferred compensation (whether vested or not), customer deposits for undelivered goods/services, accrued but unpaid bonuses (above ordinary course), unfunded pension/retirement obligations, earnouts from prior acquisitions, post-termination obligations, and tax obligations beyond current year. Letting these ambiguities live into the definitive agreement invites disputes. Also define the cash calculation: operating cash yes, restricted cash no, customer trust balances no. Clarity prevents surprises.
Real-World Example
A deal values a business at $30M enterprise value. At closing: bank term loan outstanding $2.8M, revolving credit balance $1.2M, capital lease obligations $400K. Cash: $750K in operating accounts, $120K in a restricted escrow for workers' comp claims (excluded), $180K minimum operational float (excluded). Debt-like items negotiated: $200K accrued Q4 bonuses unpaid, $90K customer deposits for services not yet performed. Calculation: Total debt = $2.8M + $1.2M + $400K + $200K + $90K = $4.69M. Cash available to sweep = $750K. Net debt = $4.69M − $750K = $3.94M. Seller proceeds = $30M − $4.69M debt paid off + $750K cash swept = $26.06M (before WC adjustment and escrow). Had the parties not negotiated the "debt-like items" carefully, the buyer might have tried to add $500K more of debatable items, costing the seller $500K of proceeds.
Why It Matters & Common Pitfalls
- !"Debt-like items" are where deals leak. Every $100K of debt-like items is $100K off the seller's check. Negotiate the list in the LOI.
- !Cash sweep logistics. The buyer needs operational float; don't sweep literally every penny at closing.
- !Restricted cash. Cash held in trust, escrow, or lock-boxes typically isn't available for sweep.
- !Capital leases. Generally treated as debt. Operating leases typically not, though accounting standard changes have muddied this.
- !Customer deposits. If service hasn't been delivered, the buyer owes that service post-close — reasonable to treat as debt.
- !Timing of balance sheet measurement. Define specifically whether net debt is measured at signing, closing, or specific date.
- !Post-closing true-up. Some deals true up net debt at closing like working capital; others treat it as point-in-time at closing.
- !Tax considerations. Debt paid off by buyer at closing doesn't create additional tax for seller; it's already their obligation.
Frequently Asked Questions
What is net debt in M&A?↓
What counts as debt in a net debt calculation?↓
Who keeps the cash at closing?↓
Related Terms
Enterprise Value
The total value of a business's operations, independent of how the business is financed — calculated as equity value plus debt, minus cash.
Cash-free, Debt-free
A standard M&A pricing convention where the seller keeps all cash at closing and pays off all debt, so the purchase price reflects only the value of the operating business itself.
Working Capital Adjustment
A purchase price adjustment comparing the business's working capital at closing to an agreed target (the "peg") — with any shortfall deducted from seller proceeds and any surplus added.
Equity Value
What shareholders receive from an M&A transaction — calculated as enterprise value minus net debt. If a business is valued at $30M enterprise value and has $3M of net debt (debt minus cash), equity value is $27M — the amount distributed to equity holders at closing. Equity value is the seller's actual payout, not the headline enterprise value. See [Enterprise Value](#enterprise-value) and [Net Debt](#net-debt) for full mechanics.
Post-Closing Adjustment
Reconciliation of estimated closing balances (working capital, debt, cash) to final actual amounts, with net difference paid between buyer and seller — typically finalized 60-120 days after closing.
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Disclaimer: The information provided on this page is for educational and informational purposes only. It should not be considered financial, legal, or investment advice. Business valuations depend on many factors specific to each situation. Always consult with qualified professionals — including business brokers, CPAs, and M&A attorneys — before making acquisition or sale decisions. LegacyVector is not a licensed broker, financial advisor, or attorney. Data shown may be based on limited samples and may not reflect current market conditions.
LegacyVector Research Team
Reviewed by M&A professionals · Updated April 2026