Net Debt
Total debt minus cash, representing the net financial obligations that reduce a company's equity value.
Full Definition
Net debt is the total amount of debt obligations minus available cash and cash equivalents. It represents the net financial burden that reduces the equity value receivable by shareholders in a transaction.
Calculation: Net Debt = Total Debt - Cash and Cash Equivalents
Components typically included as debt:
- Bank loans and overdrafts
- Finance leases (IFRS 16 consideration)
- Bonds and loan notes
- Shareholder loans
- Hire purchase obligations
- Deferred consideration payable
- Pension scheme deficits
- Corporation tax payable
Components typically treated as cash:
- Bank balances and deposits
- Short-term investments
- Restricted cash (may be excluded)
- Deferred consideration receivable
- Tax refunds due
Why net debt matters:
- Bridges Enterprise Value to Equity Value
- Determines what sellers actually receive
- Key negotiation item in purchase agreements
- Often requires detailed definition in SPA
UK practice: Net debt schedules in UK SPAs are typically detailed, with schedules listing exactly what items are included. Disputes often arise over borderline items like pension contributions, bonus accruals, and working capital boundaries.
Related Terms
Enterprise Value
The total value of a business including both equity and debt, representing the price to acquire the entire entity.
Equity Value
The value attributable to shareholders, calculated as Enterprise Value minus net debt and debt-like items.
Completion Accounts
Financial statements prepared at completion to calculate final adjustments to the purchase price.
Working Capital
The operating liquidity of a business, typically calculated as current assets minus current liabilities.