The buyer is insisting on a cash-free, debt-free deal but is defining debt to include our long-term leases and software contracts. How do we prevent these purchase price deductions?

Question

Tyler Smith · Accepted Answer

In a cash-free, debt-free transaction, the buyer expects you to pay off all traditional bank debt before closing. However, aggressive buyers will try to expand the definition of debt to include normal operating liabilities, such as lease obligations, customer pre-payments, and multi-year software contracts. If they succeed, these items are deducted dollar-for-dollar from your purchase price.

You must push back on these reclassifications during the letter of intent phase. Argue that long-term leases and software licenses are ongoing operational expenses, not financial debt. Show that these expenses are already baked into your EBITDA calculation. If the buyer subtracts them as debt while also benefiting from the lower EBITDA they cause, they are double-dipping.

Use your EOS V/TO to present your long-term operating commitments as essential infrastructure that drives the company future revenue. Ensure your legal counsel limits the definition of debt strictly to borrowed money, capital leases, and unpaid taxes. By setting these definitions early, you protect your valuation from death by a thousand cuts.