Debt free cash free
M&A / Merger ModelThe convention of agreeing a price for the business itself, with the seller taking the cash and settling the debt out of the proceeds.
Also written: cash free debt free, debt free cash free basis
Almost every European private sale is priced on a debt free cash free basis. The parties negotiate an enterprise value for the operations, and the amount the seller actually receives is the equity value that falls out of the bridge at completion: enterprise value less debt and debt like items, plus cash, adjusted for working capital against an agreed normal level.
This turns the bridge from an analytical exercise into a negotiation. Every item argued into the debt column reduces the seller's proceeds euro for euro, which is why buy side diligence spends real time building a case that deferred revenue, a provision, an operating cash floor or a supply chain finance balance belongs there, and why the seller's advisers resist each one.
The working capital adjustment exists because the enterprise value was agreed assuming a normal level of working capital in the business. Handing over a company stripped of inventory and with every receivable collected would deliver less than was priced, so the price moves against an agreed peg.
How the final number is fixed is a separate question. Completion accounts settle the actual position at completion after the event; a locked box fixes the price against an earlier balance sheet with the seller barred from extracting value afterwards. Both mechanisms sit on top of the same bridge.
Worked example
A buyer offers an enterprise value of 500 for a business with borrowings of 120, cash of 30 and a pension deficit of 20.
Debt like items total 140 and cash adds 30, so the seller receives 390 before any working capital adjustment.
Argue the pension deficit should be added net of tax at 25% instead and the seller receives 395. That one line of reasoning is worth 5, which is why it gets argued.