During the LOI negotiation, the buyer is proposing a cash-free, debt-free transaction but is defining debt to include our outstanding lease liabilities for our vehicle fleet and equipment. How do we challenge this definition to prevent our purchase price from being reduced by routine operating leases?

Question

Tyler Smith · Accepted Answer

In a cash-free, debt-free transaction, buyers will often try to expand the definition of debt to include any long-term liabilities they can find, especially operating leases. By classifying your vehicle fleet and equipment leases as debt-like liabilities, they can subtract these balances directly from your cash purchase price at closing. You must fight this classification aggressively.

The distinction lies in whether these leases are fundamental to generating the EBITDA the buyer is purchasing. Operating leases for vehicles and equipment are ongoing operating expenses; they are already deducted from your revenues to calculate your EBITDA. If the buyer subtracts the lease liability from the purchase price while also benefiting from the EBITDA those assets produce, they are double-dipping.

To counter this, work with your advisors to establish a clear boundary in the LOI. Define debt strictly as funded debt, such as bank loans, lines of credit, and shareholder notes. Argue that operating leases must be excluded from debt and instead treated as routine operating commitments that transition with the business, just like your facility lease. Back this up by showing how your EOS® Accountability Chart and weekly operations rely on these leased assets as standard operating tools, not financial leverage. Establishing this clear definition early prevents a massive, unexpected purchase price reduction at the closing table.