Cash-free Debt-free

Cash-free debt-free is a pricing principle under which operating enterprise value is negotiated independently of existing cash and financial debt. Cash and debt are then reflected in the equity price or distributed and repaid before completion. This makes the purchase price comparable regardless of the cash balance on the reference date. On this basis an enterprise value is negotiated, which is then converted through the equity bridge into the price actually payable: financial liabilities are deducted from enterprise value, cash is added, and deviations of working capital from the agreed normal level are taken into account.

Disputes rarely concern the principle but the definitions. The agreement determines which cash is credited. Freely available balances need to be distinguished from minimum operating cash, pledged accounts or funds subject to distribution restrictions. On the other side, debt-like items capture matters not shown as bank debt but economically equivalent to debt, such as underfunded pension obligations, lease liabilities, unpaid bonuses, litigation provisions, deferred capital expenditure or declared but unpaid dividends. Every additional item accepted reduces the price one for one and can therefore materially affect proceeds.

The principle should be distinguished from a locked box structure, which fixes the price at a past date and dispenses with later adjustment, and from completion accounts, which determine exactly that adjustment after the event. In preparing a sale it is advisable to build one's own equity bridge early and to examine the figures for which positions a buyer is likely to classify as debt-like. Anticipating that discussion costs less negotiating power during the process. Cleaning up obvious matters before the process starts is equally important, such as distributing non-operating cash or repaying shareholder loans. Both create clarity and prevent secondary points from shaping the price.