Cash-free, Debt-free Transactions

Many M&A transactions are negotiated on a cash-free, debt-free basis, by both the buyer and the vendor. Before the final agreement between both parties, it is important to identify all the underlying issues on cash- and debt-like items to identify and quantify potential adjustments, and provide value certainty before the final agreement is put into writing.

There are three important considerations in negotiating a cash-free, debt-free transaction in order to derive the best possible transaction value:

Unreconciled balances

1. The cash book value is typically used when negotiating a transaction, however, often enough, the cash book value is not properly derived and has not been subject to a full reconciliation to the bank statements, resulting in discrepancies between the company’s book value and its bank account balance.

It is important to consider the underlying cash accounts, identifying cash items that require further evaluation and reclassification. By providing an appropriate treatment of each cash specific issue based on specific accounting classifications, an accurate cash balance and consistent treatment of accounts could then be reflected. 

Potential debts and outstanding liabilities

2.  A debt- and liability-free assumption (as a general rule) means that any debt and liability will be deducted when arriving at an agreeable transaction value. More often in practice, this is unlikely the case as the analysis of debt and debt-like items are often too complex to analyse, which causes debt and liability position to be falsely altered.

A thorough review should be done to the trial balance and balance sheet to fully comprehend each and every item included to provide an unbiased view on debt and debt-like items beyond just interest-bearing debts. This will offer a better insight for both the buyer and the vendor, clearly indicating that the entitlement to certain deduction or responsibility for certain obligations. 

Resolve the terms and conditions

3. A buyer’s point of view of the final transaction price often differs from that of a vendor as there is no outlying standard of terms that appropriately defines the complexity within the cash-free, debt-free adjustment. From both the buyer and the vendor’s perspectives, regardless of whether an item falls on the cash or debt side of the equation, it requires sufficient analysis so that each component of the cash and debt items can be properly defined to construct the best possible final transaction price.

An extensive review and discussion on cash, debt, and debt-like items promote integrity behind the value adjustments and how it could be applied to the final transaction price. This provides guidance to both parties to reach an agreement on subjective areas, such as unreconciled balances and potential debts and outstanding balances, to create value through careful consideration thereby allowing an efficient transaction to take place with fewer disputes.

It is critical to understand a company’s net working capital and its cash and debt-like items to facilitate the negotiation on cash, debt, and debt-like items to arrive at the ultimate transaction price.