What Does “Cash-free, Debt-free” Mean in M&A Transactions?

Most M&A deals are priced on a cash-free, debt-free basis.  What does that mean?

That means that the purchase price is determined on the basis that the target company will be delivered without cash or debt on its balance sheet.  

As far as cash goes, the seller retains all the cash and cash equivalents on the company’s balance sheet for pricing purposes.  

There’s no need for the buyer to pay dollar-for-dollar for cash.  Note that this is a bit simplistic, as cash may indeed come with the deal as a part of working capital in some instances.

All financial debt (including bank loans, bonds, and other forms of borrowing) is excluded from the transaction, and typically, the seller is responsible for paying off any existing debt before or at closing.

Why are deals done this way?  A couple of reasons:

It simplifies the valuation of the company without it being influenced by the current levels of cash and debt

It provides a standardized way to compare different acquisition opportunities, making it easier for buyers to evaluate and make informed decisions.