Having debt does not prevent the sale of a company. We explain the common mechanisms — cash-free/debt-free, debt assumption, prior restructuring — and how indebtedness affects the sale process and valuation.
One of the most persistent misconceptions among business owners is that a company with significant debt cannot be sold. This is simply not true. Companies are sold with debt every day — it is, in fact, the norm rather than the exception. What matters is not whether debt exists, but how it is handled in the transaction structure and how it affects the valuation.
The most common transaction structure in the middle market is the cash-free, debt-free (CFDF) model. Under this approach:
In this structure, the seller effectively repays the company’s debt from the sale proceeds. The buyer receives a company free of financial debt.
In some transactions, the buyer agrees to assume the company’s existing debt as part of the deal. This typically occurs when the debt is on attractive terms (low interest rates, long maturities) that the buyer prefers to maintain, or when the transaction is structured as an asset purchase where specific liabilities are transferred.
When the company’s debt is excessive or on unfavourable terms, a restructuring before the sale may be necessary. This can involve renegotiating terms with creditors, converting debt to equity, or using part of the sale proceeds to settle the most problematic obligations.
Moderate debt (1-2x EBITDA). This is normal and healthy. It does not significantly impact the enterprise value or the buyer’s interest. The debt is simply subtracted from the enterprise value to arrive at the equity value.
High debt (3-4x EBITDA). This raises concerns. Buyers will scrutinise the company’s ability to service the debt, the terms and covenants, and whether the debt level has constrained the company’s operations or investment. The enterprise value may be unaffected, but the equity value — what the seller receives — will be significantly reduced.
Distressed debt (5x+ EBITDA or covenant breaches). This fundamentally changes the nature of the transaction. The company may be worth more to a buyer who can restructure the debt than to the current owner who cannot. In extreme cases, the equity value may be zero, and the transaction becomes a restructuring rather than a conventional sale.
Tax debt. Unpaid taxes create risk because the tax authorities have priority claims and aggressive enforcement tools. Buyers are particularly cautious about undisclosed tax liabilities.
Contingent liabilities. Warranties, guarantees, and potential litigation claims represent uncertain future obligations that buyers will try to quantify and adjust for.
Related-party debt. Loans between the company and its owners or related parties can complicate the clean-up of the balance sheet and may raise questions about the company’s true operating performance.
Covenant breaches. If the company is in breach of its loan covenants, the lenders may have the right to accelerate repayment. This creates urgency that weakens the seller’s negotiating position.
Disclose all debt early. Hidden debt discovered during due diligence is toxic to a transaction. Full disclosure from the outset builds trust and prevents surprises.
Engage your lenders early. If the sale requires lender consent or will trigger change-of-control provisions, engaging the banks early in the process avoids last-minute complications.
Consider refinancing before the sale. If the company’s current debt is on unfavourable terms, refinancing before going to market can improve the presentation and reduce buyer concerns.
Focus on the equity value. The headline enterprise value is important, but what matters to the seller is the equity value — the amount received after debt is settled. Understanding this distinction prevents unrealistic expectations.
Debt is not a barrier to selling a company — it is a variable that must be managed. The mechanisms for handling debt in M&A transactions are well-established and flexible. The key is transparency, preparation, and realistic expectations about the relationship between the company’s debt burden and the seller’s net proceeds.
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
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