From the cash on the completion balance sheet to the free cash the buyer pays for, with minimum operating cash measured from the intra-month trough rather than asserted.
In a cash-free debt-free deal the buyer pays euro for euro only for free cash: the cash in the bank statements at completion, less payments already issued but not cleared, less cash trapped where shareholders cannot reach it, less the minimum operating cash the business needs to trade. On an illustrative company with 9.40 million in the bank, only 4.95 million counts, and the seller's price falls from 69.40 million to 64.95 million. That 4.45 million is a definition, not a valuation.
Worked in full in Closing the Deal by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Sellers read "cash-free" as "every euro of cash is added to the price". Buyers read it as "the business is delivered with the cash it needs, and only the surplus is paid for". Both readings are defensible, the SPA rarely settles the point in figures, and the gap is usually larger than the working capital adjustment the parties spend weeks negotiating.
| Input | Value |
|---|---|
| Enterprise value agreed | 90.00 |
| Financial debt repaid at completion | 30.00 |
| Cash per bank statements at completion | 9.40 |
| Supplier payments issued, not yet cleared by the bank | 0.65 |
| Cash in a subsidiary that cannot be distributed | 1.20 |
| Withholding tax if that cash were repatriated | 10% |
Step 1: from bank cash to book cash. The ledger records a supplier payment when it is issued; the bank records it when it clears. Payments of 0.65 million issued in the last days before completion have left the business economically, and the payables have already gone from working capital, but the money is still in the bank balance. Counting it as cash pays the seller twice.
Book cash = 9.40 − 0.65 = 8.75
Step 2: remove trapped cash. The 1.20 million in a subsidiary cannot be distributed without regulatory or tax obstacles, so in the base case it is excluded.
Step 3: measure minimum operating cash. A month-end balance flatters any business that pays wages and suppliers before customers settle. The test is how far the bank balance falls in the following month before receipts restore it. Twelve months of illustrative data:
| Month | Drawdown | Month | Drawdown |
|---|---|---|---|
| 1 | 1.80 | 7 | 1.74 |
| 2 | 2.10 | 8 | 2.00 |
| 3 | 2.50 | 9 | 2.30 |
| 4 | 1.90 | 10 | 2.10 |
| 5 | 2.20 | 11 | 1.90 |
| 6 | 2.40 | 12 | 2.60 |
The drawdowns sum to 25.54, an average of 2.13; the highest is 2.60. A business delivered with less than its worst month's drawdown would go overdrawn in that month, so the buyer argues for 2.60.
Free cash = Book cash − Trapped − Minimum operating cash = 8.75 − 1.20 − 2.60 = 4.95
Excel: =BankCash-Uncleared-Trapped-MAX(Drawdowns)
Step 4: the equity price.
Seller's reading: 90.00 − 30.00 + 9.40 = 69.40
Buyer's reading: 90.00 − 30.00 + 4.95 = 64.95
The gap is 4.45 million, 6.4 per cent of the seller's figure and 6.9 per cent of the buyer's. Of it, 0.65 is the uncleared payments, which the seller should concede because it is a double count; 1.20 is trapped cash, which is negotiable; and 2.60 is minimum operating cash, which is where the real argument is. Minimum operating cash here is 2.9 per cent of enterprise value, and it is often left as an undefined phrase in the SPA until the completion accounts are drawn up, which hands the drafting to whoever prepares them.
| Measure | Minimum cash | Free cash | Equity price | vs 69.40 |
|---|---|---|---|---|
| Average drawdown | 2.13 | 5.42 | 65.42 | −3.98 |
| Second-highest month | 2.50 | 5.05 | 65.05 | −4.35 |
| Highest month | 2.60 | 4.95 | 64.95 | −4.45 |
| Highest month plus 10% buffer | 2.86 | 4.69 | 64.69 | −4.71 |
The range across defensible measures is 0.73 million. Separately, if the trapped cash can be repatriated at the cost of a 10 per cent withholding tax, the honest treatment is to count it net, 1.08 million, which lifts the buyer's price to 66.03 million. Excluding repatriable cash entirely is as wrong as counting it gross.
None of these measures is wrong; each answers a slightly different question about how much risk of an overdraft the buyer should accept on day one.
Agree minimum operating cash as a number in the SPA, with the data behind it, before signing. Left as a phrase, it becomes a completion accounts dispute the buyer opens from the stronger position.
The bridge from an agreed enterprise value to the price for the shares, with every arguable item on its own switch, is rebuilt in the free workbook for this case.
The price is agreed as if the company had no debt and no cash; at completion, debt is deducted and free cash added euro for euro. On an illustrative 90.00m enterprise value with 30.00m of debt, every euro of cash that counts adds a euro to the 60.00m starting point, so the definition of cash is worth as much as the definition of debt.
Measure how far the bank balance falls below its month-end level before the next receipts arrive, for each of the last twelve months, and take a high percentile. With illustrative drawdowns averaging 2.13m and peaking at 2.60m, the buyer argues for the peak and the seller for the average: a 0.47m difference that moves the price euro for euro.
Not always. Cash that can be repatriated at a cost can be counted net of that cost instead of excluded. Illustrative trapped cash of 1.20m in a subsidiary, repatriable with a 10 per cent withholding tax, would count as 1.08m and raise the equity price from 64.95m to 66.03m.
This article is one calculation from Closing the Deal. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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