Debt-Free Cash-Free
AdvancedDebt-free cash-free is a common basis for pricing an acquisition, in which the buyer agrees a price for the business assuming it has no debt and no cash, with the final payment to the seller adjusted for the actual debt and cash at completion.
Buyers usually value a business based on its operations, often as a multiple of its earnings, which gives an enterprise value. Debt-free cash-free pricing converts this into the price paid for the shares.
The seller keeps the benefit of any cash in the business and bears the cost of any debt. In practice, the price for the shares equals the enterprise value plus cash minus debt and debt-like items, adjusted for any difference between actual working capital and the agreed peg.
For example, a buyer agrees an enterprise value of 100,000,000. At completion, the business has cash of 8,000,000 and debt of 30,000,000. The equity price paid to the seller is 78,000,000, before any working capital adjustment.
Negotiations often focus on what counts as debt and cash. Items such as unpaid taxes, deferred revenue, pension deficits and trapped cash that cannot easily be used can be debated, since each affects the final price.
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