valuation
Net debt is interest-bearing debt and debt-like claims minus cash (and surplus cash-like investments). It is the bridge item that turns enterprise value into equity value in a cash-free, debt-free deal.
Net debt is how valuation converts an enterprise value agreed on operations into equity value for the shares. In a cash-free, debt-free SPA, the economic idea is:
Equity proceeds ≈ EV − net debt ± normalised working capital adjustment
A typical analytical definition:
Net debt = interest-bearing debt + lease liabilities + other debt-like items − cash − surplus marketable securities
"Debt-like" is where deals are won and lost: shareholder loans, declared but unpaid dividends, corporation tax on pre-completion profits (locked-box leakage), overdrafts, drawn factoring, pension deficits, deferred consideration, and put options on NCI.
IAS 7 tells you what cash and cash equivalents are in the accounts; a buyer may still treat trapped cash in a jurisdiction with blocked dividends as not surplus.
Subtracting all cash from debt can overstate equity value if the operations need a cash buffer. Practitioners often distinguish surplus cash from operating cash. There is no IFRS bright line; there is a diligence file (cash by entity, restrictions, customer deposits, collateral).
IFRS 16: if EBITDA is post-16 (rent removed), lease liabilities belong in net debt so EV/EBITDA stays consistent.
Invented Lumen Dental, EV €24.8m, illustration only. €m.
| Item | Classification | Amount |
|---|---|---|
| Bank term loan | Debt | 5.0 |
| IFRS 16 leases | Debt-like | 1.8 |
| Shareholder current account | Debt-like | 0.8 |
| Drawn factoring | Deal-specific; often debt-like | 0.6 |
| Cash in OpCos | Surplus (unrestricted) | (0.4) |
| Customer prepayments | Working capital, not net debt | — (in NWC target) |
| Net debt for equity bridge | 7.8 | |
| Implied equity | 24.8 − 7.8 | 17.0 |
If the seller "forgot" factoring and the current account, they thought equity was €18.4m. The SPA definitions, not the CIM footnote, decide.
Locked-box and completion-accounts mechanisms exist because net debt and working capital move every day. Leverage covenants use a related but not identical net-debt definition (often excluding leases, or including them—read the facility). PE entry leverage is net debt / EBITDA at closing, using the lender's definition, which may differ from the SPA's.
Hybrids, earn-outs and vendor loan notes sit on a spectrum. Pensions can be debt-like for valuation and treated differently for IFRS. Two honest firms will still negotiate a schedule. Precision comes from the schedule, not from the words "net debt" on a slide.
Dazur puts a net-debt schedule next to EV on day one of a process. That single artefact prevents the most common mid-market blow-up: agreeing "the business is worth 25" and discovering at signing that the shares are worth 17. Buyers and sellers should fight about classification in week two, not at the printer.