Net Debt

What Is Net Debt?

Net debt is the difference between a company’s total financial debt and its cash and cash equivalents:

Net Debt = Total Financial Debt − Cash and Cash Equivalents

If net debt is positive, the business has more debt than cash — a net borrowing position. If net debt is negative, the business has more cash than debt — a net cash position.

In M&A, net debt is one of the most important concepts in the bridge from enterprise value to equity value.

Net Debt in the Enterprise Value to Equity Value Bridge

Enterprise value represents the total value of the business to all capital providers — both debt holders and equity holders. To arrive at the equity value the seller receives, net debt (and the working capital adjustment) is subtracted from enterprise value.

Equity Value = Enterprise Value − Net Debt ± Working Capital Adjustment

Example 1: Business with Net Debt

	Amount
Agreed enterprise value	A$20,000,000
Bank loan	(A$3,500,000)
Finance lease liability	(A$800,000)
Cash and cash equivalents	+A$200,000
Net debt	(A$4,100,000)
Equity value (seller receives)	A$15,900,000

Example 2: Business with Net Cash

	Amount
Agreed enterprise value	A$20,000,000
Bank loan	(A$500,000)
Cash and cash equivalents	+A$2,800,000
Net cash position	+A$2,300,000
Equity value (seller receives)	A$22,300,000

What Counts as Debt in the Net Debt Calculation?

The definition of “debt” in the net debt calculation is a key negotiating point in every M&A transaction. The share purchase agreement will define the debt items precisely. Common inclusions:

Typically included in debt:

• Bank loans, revolving credit facilities, overdrafts
• Finance lease liabilities (AASB 16 / IFRS 16 lease liabilities)
• Shareholder loans (from the selling owner to the company)
• Related-party loans
• Bonds and notes payable
• Hire purchase obligations
• Deferred consideration payable to prior vendors
• Unfunded pension liabilities
• Derivative liabilities

Typically excluded from debt (treated separately):

• Trade creditors and accounts payable (treated as part of working capital)
• Tax payable (treated as part of working capital)
• Deferred revenue (treated as part of working capital)
• Accrued expenses (treated as part of working capital)

Items subject to negotiation:

• Directors’ loan accounts (may be treated as debt, equity, or dividend on closing)
• Customer deposits held in trust
• Contingent liabilities not yet crystallised

Cash-Free, Debt-Free Basis

Most M&A transactions in the APAC mid-market are conducted on a cash-free, debt-free (CFDF) basis. This means:

• The seller clears all debt from the balance sheet before completion (or the purchase price is reduced by the debt amount)
• The seller retains all cash on the balance sheet (or the purchase price is increased by the cash amount)

CFDF is the standard because it simplifies the equity value calculation — enterprise value agreed by the parties equals the equity value the seller receives, with a separate working capital adjustment mechanism.

Net Debt and the Locked Box vs Completion Accounts Decision

The mechanism for calculating net debt at closing is determined by the choice of completion mechanism:

• Completion accounts: Net debt is calculated at the actual closing date. The parties agree on definitions and methodology upfront, then measure actual net debt at closing. A post-completion adjustment is made if net debt differs from the estimate.
• Locked box: A reference balance sheet is agreed at a historical date (the “locked box date”). Net debt is fixed at that date. No post-completion adjustment is made, but leakage provisions protect the buyer from the seller extracting cash between the locked box date and closing.

Why Net Debt Matters for Sellers

Sellers preparing for an M&A transaction should:

1. Map all balance sheet debt items early — identify every instrument that will count as debt in the buyer’s eyes, including finance leases under IFRS 16, shareholder loans, and related-party payables
2. Plan the repayment of debt — in CFDF structures, bank loans and most financial debt are typically repaid at or before closing from deal proceeds
3. Clarify director loan treatment — director loan accounts (where the owner has lent money to the company) are typically repaid to the seller at closing as a separate item; director loan accounts where the company has lent to the owner are treated as debt to be repaid before closing
4. Understand the cash position — on a CFDF basis, cash held in the business at closing is typically retained by the seller (or added to consideration); sellers should not withdraw cash unnecessarily in the weeks before closing as this may trigger locked box leakage provisions or working capital shortfalls
5. Review IFRS 16 lease liabilities — since the adoption of IFRS 16, operating lease liabilities now appear on the balance sheet and buyers increasingly include them in the net debt calculation; sellers should be aware of the impact on equity value

Lyndon Advisory advises sell-side clients through the enterprise value to equity value bridge, net debt definition negotiations, and completion mechanism structuring as part of every transaction.