Every Letter of Intent we receive states the transaction will be on a debt-free, cash-free basis, but we do not fully understand what gets swept out and what must stay in. How do we audit our balance sheet before the transaction to make sure we do not leave valuable capital behind?

Question

Tyler Smith · Accepted Answer

A debt-free, cash-free structure means you keep all the cash on your balance sheet at close, but you must also pay off all outstanding debt, such as bank loans, lines of credit, and equipment leases. The confusion arises when defining what constitutes cash versus what is required as working capital to run the daily operations.

To prevent leaving valuable capital behind, you must conduct a thorough balance sheet audit before you sign an LOI. Start by isolating your operating cash from your excess cash. Operating cash is the money required to fund day-to-day payroll and vendor bills, which must remain in the business as part of your Net Working Capital. Excess cash is everything above that baseline, which you can sweep out to your personal accounts.

Use your weekly Scorecard metrics and cash flow forecasts to establish exactly how much cash is needed to run your operating system. Document your customer deposits and pre-billed revenue carefully, as buyers often try to classify pre-paid revenue as working capital while leaving you with the delivery obligation.

Identify any liabilities that are debt-like, such as accrued bonuses or deferred taxes, and negotiate their treatment upfront. Clear definitions of cash and debt in your early deal terms prevent the buyer from clawing back your cash during the final working capital reconciliation.