Debt-like Items

Debt-like items are obligations that economically act like debt, even if they are not shown as a classic loan. Examples include pension obligations or outstanding tax payments. In purchase price determination, they are treated like debt and deducted from the price.

The typical list is long and renegotiated in every transaction: underfunded pension and part-time retirement obligations, lease and hire purchase liabilities, factoring and other receivables pre-financing, unpaid bonuses and severance, holiday and overtime accruals, provisions for litigation and warranties, outstanding tax payments including tax on current-year profit, declared but unpaid dividends, deferred capital expenditure with catch-up needs, the seller's transaction costs and remediation or contamination obligations. The underlying principle is simple: the question is whether an item economically belongs to the seller’s period and has not already been reflected in enterprise value or working capital. Not every future payment is automatically debt-like. Because such items feed one for one into the price, their recognition often matters more economically than a debate about the multiple: five million euros of additional items cost the seller the same amount, while half a turn of multiple on ten million euros of EBITDA is five million euros.

The arguments come from financial due diligence, so sellers are well advised to define debt-like items as conclusively as possible in the letter of intent and to avoid double counting with working capital. A test-based approach helps: it captures obligations that already exist at the reference date but lead to payments later, together with benefits the seller has already collected whose cost only arises afterwards. Conversely there are also cash-like items favouring the seller, such as non-operating assets or recoverable tax claims, which increase the price. A complete list in both directions is therefore part of a clean negotiation.