Net Debt
Net debt is the sum of all interest-bearing and debt-like liabilities less freely available cash. In company transactions it is deducted from enterprise value to arrive at the price paid for the shares. Which items count is a matter of negotiation, not of law.
Companies are normally valued on a cash-free, debt-free basis. What is negotiated is the enterprise value of the operating business; what is paid is the equity value of the shares. The bridge between the two is net debt: debt reduces the price, free cash increases it.
The uncontested core
- bank loans, overdraft facilities and shareholder loans
- bonds, promissory notes and convertible loans
- finance leases and other interest-bearing obligations
- less cash in hand, bank balances and short-term deposits
The argument starts with debt-like items
What matters in practice are the positions that are not debt in the narrow sense but behave economically like debt. Buyers regularly put forward: pension provisions, deferred maintenance and capital expenditure backlog, unpaid bonuses and severance, holiday and overtime accruals, tax arrears from open audits, the seller's transaction costs, provisions for litigation and, in fast-growing software businesses, deferred revenue.
Conversely, not every balance is freely available. Pledged accounts, rental deposits, amounts in escrow and the cash the business needs to operate are frequently not accepted by the buyer as surplus funds.
The rule against double counting
Each position may be counted once only – either in net debt or in working capital. If a holiday accrual is both deducted as a debt-like item and reflected in the working capital target, the seller pays twice. That double count is the most common arithmetical error in price bridges – and one of the few that can be proven with a clean schedule.
What preparation is worth
A seller should derive their own net debt before the review starts: a schedule of every position, each with an amount, evidence, and a reason why it belongs in or out. That does not remove the negotiation, but it shifts the burden of proof. A schedule the buyer only has to check is a different starting position from one the buyer has to build.
The link to adjusted earnings is close: anyone stripping a cost out of EBITDA should expect the buyer to put the related obligation into net debt. See EBITDA normalisation.