Cash-Free Debt-Free
Cash-free debt-free is the basis on which most private company prices are quoted: the buyer pays for the business as if it had no cash and no debt, and the price is adjusted at completion — up for cash left in, down for debt inherited and debt-like items, and for the gap between actual and normal working capital. The headline is enterprise value; what the seller receives is equity value.
- Also known as
- CFDF, Cash-free, debt-free basis, Debt-free cash-free
- Used at
- heads of terms, indicative offers and sale agreements for private companies; the standard in Europe and the US alike
- Binding
- yes, once the sale agreement defines cash, debt, debt-like items and the working capital target and mechanism
- Typical adjustments
- plus cash and cash equivalents (less trapped or restricted cash); minus borrowings, accrued interest, overdue tax, unpaid bonuses, deferred consideration from earlier deals, and other debt-like items; plus or minus the working capital variance against a target
- Typical dispute
- what counts as debt-like — deferred revenue, customer deposits, a regulatory shortfall — and what counts as cash for a fintech that holds client money
- Parties
- the buyer and the seller, and the accountants who prepare and contest the completion statement
How cash-free debt-free works in practice
A buyer values a business on its operations — a multiple of EBITDA — and does not want to pay for the seller's cash balance or to inherit the seller's loans. So the offer says: €50m, cash-free debt-free. At completion the equity price is built from that: add the cash in the bank on the day, subtract the debt, and adjust for working capital against a normal level, so that the seller cannot inflate the cash by not paying suppliers in the last month. The sale agreement defines every term, and the definitions are the deal: a seller wants "debt" to mean bank borrowings only; a buyer wants it to include everything that will cost cash after completion and did not earn it before — unpaid bonuses, the tax bill for the seller's period, the earn-out still owed from the seller's own last acquisition, the capex committed but not spent.
For a fintech two items are peculiar. Client money — the balances an e-money institution safeguards — is cash on the balance sheet but not the company's, and is excluded; a shortfall in the safeguarding account is debt-like. Regulatory capital that the company must hold is cash the buyer cannot take out, and buyers argue it should not be paid for as free cash. These are the definitions to settle in the heads, not in the completion statement.
The mechanism is either completion accounts — the adjustments computed after closing — or a locked box, where the balance sheet is fixed at an earlier date and the price is fixed with it.
Example
A payments company is sold for €50m cash-free debt-free with a working capital target of €2.0m. At completion the balance sheet shows €6.0m of cash, of which €3.5m is client money in safeguarding accounts and €1.2m is regulatory own funds the company must keep; €1.5m of bank debt; €0.6m of unpaid bonuses and €0.4m of overdue VAT; and working capital of €1.4m. Equity value: €50m + €1.3m of free cash (€6.0m less €3.5m of client money less €1.2m the buyer agreed to treat as trapped) − €1.5m of debt − €1.0m of debt-like items − €0.6m of working capital shortfall = €48.2m. The seller had expected €54.5m, having counted all the cash and none of the debt-like items — a €6.3m difference that was in the definitions, not the price.
Common mistakes
- Agreeing a cash-free debt-free price before agreeing what cash, debt and working capital mean. - Sellers counting client money or regulatory capital as cash they will be paid for. - No working capital target, so the seller runs the balance sheet down in the last month. - Debt-like items discovered in diligence but left out of the definition. - Treating the completion statement as arithmetic; it is the last negotiation.