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‘Cash Free Debt Free’: Is It As Simple As It Sounds?

We have heard this term many times when it comes to reviewing a business that is for sale. Often it is an early condition placed by the vendor on the sale of the business. It is intended to make the transaction simpler but has some unexpected challenges for both the company buyer and seller.

The basic idea is simple, that the business being sold comes without the cash in the business or any debt associated with the business, so the buyer gets it ‘clean’. However, this is not always the way in which it is interpreted as the interpretation of ‘cash’ and ‘debt’ is not as clear as it may seem.

At times, this definition may make a company which seems to be marketed at a good price suddenly become considerably more expensive, or in need of a significant, immediate cash injection to retain liquidity.

So, it is only by exploring more fully the conditions being applied for this status with the owner of the company being acquired that clarity can be achieved.

What Does Debt Free Mean?

Asset Valuation NAV Business

In almost all circumstances it means that these things will be stripped out of the business before the sale:

  • Shareholder loans
  • Long term debt
  • Bank debt
  • Unpaid dividends
  • Overdraft facilities
  • Cheques drawn but not paid

If there are significant debts in terms of Tax Liabilities, Letters of Credit and Staff Bonuses then these need to be discussed, potentially to be included.

Trading debts are usually excluded, but not always, as are debts to parent companies. However, these items will need to be clarified prior to making an offer or agreeing to Heads of Terms.

What Does Cash Free Mean?

Cash Valuation Down

The categories of ‘Cash’ which fall into this definition almost always include:

  • Cash in Bank
  • Cash in Hand (Petty Cash)
  • Credit Card Payments to be processes

The main sticking point is ‘book debt’, i.e. invoices for services or products ‘sold’ prior to completion.

Other types of cash should be discussed and agreed on, as and where significant. These include restricted (deposits and similar), Escrow or foreign cash and any short term investments.

The Main Area of Contention

The first area which can cause significant issues is the book debt. This can be a sizeable amount of money if the company mainly invoices which can be between 7 and 15% of the turnover.

Most business owners will state a fair and just claim for that capital, it has been earned before the deal completes and therefore is due to the vendor. However, the buyer may claim that this is due them as they will need to fulfil the services post-sale: there may be a cost of fulfilling these transactions or orders. There may also be a risk that the vendor underpriced to get inflated sales which will return value to them but not to the acquirer.

However, whatever value is placed on this can make a significant difference to the sale price. If it is excluded, then the buyer will need to account for the gap in income for the business. If included, then the overall price will rise accordingly.

Our Advice? Choose Your Battles Wisely

Whilst we have outlined a number of areas for concern, it is critical that both sides understand that a successful business sale may involve tough negotiations, but ultimately has to work for both sides. If either side pushes for everything in their favour, then there’s a high likelihood that the deal will fall through.

Therefore, for all the areas outlined above, consider these questions before making it part of the early negotiations or Heads of Terms:

  1. Will this specific issue make a significant difference to the sale price?
  2. Are there more important ‘wins’ I need to focus on?
  3. Can I use this item as a bargaining chips for other opportunities?
  4. How many other acquirers are currently interested in my company?

It is always worth bearing in mind that your eventual business sale will not be won or lost in the first round, but by focusing on the goal of a successful sale. Most acquirers are put off by early demands and detail, but once keen are willing to entertain some flexibility to get a deal across the line.

If you want to discuss how Firm Gains can help with your business sale, then compare your options here, or call us on 0333 050 8225 to discuss in more detail. We’re here to help.