The buyer is proposing a cash-free debt-free transaction, but we have significant outstanding equipment leases and shareholder loans on our balance sheet. How do we treat these liabilities during deal structuring so we are not hit with an unexpected reduction in our cash at close?

Question

Tyler Smith · Accepted Answer

A cash-free debt-free transaction means the seller keeps all the cash on the balance sheet but must also pay off all debt before or at the closing. The challenge lies in how the buyer defines debt. Financial buyers will aggressively try to categorize non-traditional liabilities, like equipment leases and shareholder loans, as debt to reduce your cash proceeds.

To protect your valuation, you must address these items during the letter of intent negotiations. For shareholder loans, the solution is straightforward: these should be converted to equity or paid off prior to close so they do not impact the transaction.

Equipment leases require a more nuanced approach. You must analyze whether these are capital leases or operating leases. Operating leases are typical business expenses and should be treated as part of your normal operating expenses and net working capital. Capital leases, however, are often viewed as debt.

Use your weekly Level 10 Meetings to align your finance team on how these items are documented. Be prepared to show the buyer that these leases are critical to daily operations and are already accounted for in your EBITDA calculations. If the buyer insists on treating them as debt, negotiate a corresponding increase in the purchase price to offset the deduction.