Net Debt

Net debt is the sum of a company's interest-bearing debt minus its cash and cash equivalents. It shows how high the debt would be if the available cash were immediately used for repayment. It is a central metric for moving from Enterprise Value to equity value. In transaction practice the definition is the real subject of negotiation, because it feeds one for one into the price payable.

On the debt side the question is what is included alongside bank loans and bonds, such as lease and hire purchase liabilities, shareholder loans, factoring, underfunded pension obligations and other debt-like items. On the cash side what matters is which funds are genuinely available: an operational minimum balance, pledged accounts, deposits given as security and funds in foreign subsidiaries that can only be distributed at a tax cost are regularly not treated as free. The reference date is a further point of dispute, because the figure fluctuates considerably within a year: seasonal businesses often show an unusually high cash balance at the financial year end, which is why buyers review the twelve-month development and align the purchase price calculation with the agreed reference date. Double counting with working capital must be avoided, for example with receivables sales or stretched supplier payments, which could be captured both as debt-like and within working capital.

Financial debt typically comprises bank loans, bonds, shareholder loans and lease liabilities, less cash, bank balances and readily marketable securities. Pension provisions, decommissioning obligations and unpaid bonuses are frequently disputed and, depending on bargaining position, treated as debt-like. A further point of contention is how much cash is operationally tied up and therefore not deductible, such as minimum balances for day-to-day operations or funds held in countries with capital controls. Purchase agreements therefore spell out the definition and support it with examples.