The buyer's offer is structured as a cash-free, debt-free transaction, but we are confused about what that actually means for our balance sheet at close. How do we calculate what cash we can legally take out of the business versus what must stay to support the operations?

Question

Tyler Smith · Accepted Answer

Many business owners are surprised to learn that a cash-free, debt-free offer does not mean they simply sweep all the cash out of the bank account on the day of closing. In a standard M&A transaction, this structure means you get to keep the excess cash and you are responsible for paying off all company debt prior to close. However, you must leave enough working capital in the business to support daily operations. This is where the net working capital peg comes into play. The buyer will expect you to leave a normal level of accounts receivable, inventory, and prepaid expenses, offset by accounts payable and accrued liabilities, so the business can function on day one. To protect your cash, you must establish a clear definition of what constitutes operating cash versus excess cash. Use your historical balance sheets and weekly Scorecard data to calculate your true average working capital cycle over the trailing twelve months. If you have automated your collections and keep your accounts receivable exceptionally lean, you must argue for a lower working capital target. Any cash in the bank above this agreed target is yours to keep, while any shortfall will reduce your purchase price at close.