The difference between a company's total financial debt and its cash and cash equivalents. It is the fundamental bridge between Enterprise Value and Equity Value in a business acquisition.
In a company acquisition, net debt is the number that converts a theoretical business valuation into the real price the seller takes home. It is the bridge between what the company is worth (Enterprise Value) and what the shareholders receive (Equity Value), and every euro of net debt is one euro less in the seller’s pocket.
Net debt is the difference between a company’s total financial debt and its cash (cash and cash equivalents). It represents the company’s net financial position: how much debt it would need to repay if it used all available cash.
Net debt = Total financial debt - Cash and cash equivalents
If financial debt is 6 million and cash is 2 million, net debt is 4 million. Those 4 million are subtracted from Enterprise Value to calculate Equity Value — what the seller receives.
The definition of financial debt is one of the most negotiated points in the SPA. It typically includes:
Clear items (always included):
Contested items (debt-like items):
The buyer will want to include as many debt-like items as possible; the seller will want to exclude them. Negotiating this list is critical because each included item directly reduces the Equity Value.
Not all cash is “free.” The distinction between free cash and minimum operating cash is fundamental:
Minimum operating cash is usually set at 1 to 3 months of monthly operating costs, depending on the sector and business seasonality.
Net debt is the equity bridge item that generates the most disputes. Some of the most common conflicts:
Reference date. Net debt fluctuates daily. Is it calculated at closing, at an earlier reference date, or as an average over a period? Completion accounts and locked box mechanisms address this differently.
Reclassifications. The buyer may attempt to reclassify working capital items as debt (or vice versa) to maximise the deduction. The seller must ensure the definition is clear and exhaustive.
Hidden debt. Unprovisioned contingencies, off-balance-sheet guarantees, undisclosed commitments. Financial due diligence is essential to identify debt that does not appear on the balance sheet.
A modular construction company in Spain is sold at an Enterprise Value of 20 million. Net debt at closing:
| Item | Amount |
|---|---|
| Syndicated loan | 3.5M |
| Machinery leases | 1.2M |
| Credit line (drawn) | 0.8M |
| Tax deferral | 0.4M |
| Total financial debt | 5.9M |
| Cash in accounts | -2.1M |
| Term deposit | -0.5M |
| Total cash | -2.6M |
| Net debt | 3.3M |
Equity Value = 20M - 3.3M = 16.7M (before working capital adjustment).
The seller will receive 16.7 million. The 5.9 million in financial debt will be repaid at closing. The 2.6 million in cash will remain within the company.
Financial debt (loans, credit facilities, leases, bonds, promissory notes) minus cash and equivalents. In practice, the exact list of items is one of the most negotiated points in the contract, because each inclusion or exclusion directly impacts the price.
Yes. When cash exceeds financial debt, the company has net cash (negative net debt). This is common in well-capitalised family businesses. In that case, Equity Value will exceed Enterprise Value.
Not directly. Trade payables are treated as a component of working capital, not financial debt. However, abnormally high supplier balances (payments beyond normal commercial terms) may be reclassified as debt in the negotiation.
If you wish to explore a potential collaboration or present an investment opportunity, we invite you to contact us. We guarantee absolute confidentiality in all our conversations.