What is debt-free cash-free? Definition, formula and example
This is for owners reading their first offer and for buyers writing one. By the end you will know what "debt-free cash-free" means, how to turn a headline price into the cash a seller actually receives, and where the arguments usually start.
What does debt-free cash-free mean?
Debt-free cash-free is a way of setting the price of a business. The buyer values the operating business alone. It does not pay extra for cash sitting in the bank. It does not take on the owner's loans.
So at closing two things happen. The seller keeps the cash, or the price goes up by that amount. And the seller's debt is paid off out of the price, so the buyer gets the business free of loans.
Most offers and letters of intent use the phrase. The law firm Orrick, in its explainer on cash-free debt-free, notes that term sheets and LOIs often give a headline value "on a cash-free, debt-free basis." The headline number is close to the enterprise value of the business. What the seller takes home is the equity value, after cash, debt and working capital.
How is it calculated?
The basic formula is short:
Seller proceeds = headline price + cash − debt − debt-like items ± working capital adjustment
Each part means something specific:
- Headline price. The number in the offer, often a multiple of EBITDA or SDE.
- Cash. Money in the business bank accounts at closing. The seller keeps it, or the buyer pays for it.
- Debt. Bank loans, lines of credit, equipment loans and seller-owed notes. These are paid off at closing from the price.
- Debt-like items. Bills that act like debt but are not loans. Examples: unpaid bonuses, past-due taxes, customer deposits for work not yet done. The buyer and seller negotiate this list.
- Working capital adjustment. The buyer expects a normal level of receivables and payables to come with the business. If the seller delivers less than the agreed level, the price drops. If more, it rises. Our post on the working capital peg explains how that level is set.
Investopedia's enterprise value page shows the same idea from the other side: enterprise value equals equity value plus debt, minus cash.
Worked example
Here is an illustrative deal. The numbers are made up but add up. A buyer offers 5x EBITDA for a business with $1,000,000 of EBITDA, on a debt-free cash-free basis.
| Line | Amount |
|---|---|
| Headline price (5.0x × $1,000,000) | $5,000,000 |
| Plus cash in the bank at closing | +$300,000 |
| Minus bank term loan paid off | −$900,000 |
| Minus equipment loans paid off | −$150,000 |
| Minus unpaid staff bonuses (debt-like) | −$50,000 |
| Working capital: $360,000 delivered vs $400,000 agreed | −$40,000 |
| Seller proceeds before fees and taxes | $4,160,000 |
Proceeds = $5,000,000 + $300,000 − $900,000 − $150,000 − $50,000 − $40,000 = $4,160,000.
The seller heard "five million". The cash at closing, before advisor fees and taxes, is about 83% of that. Nothing went wrong. That is how the structure works.
Where does it show up in a deal?
It first shows up in the letter of intent. The LOI states the headline price and says "on a cash-free, debt-free basis." Many LOIs stop there. The details come later, in the purchase agreement.
The purchase agreement then defines "cash", "indebtedness" and "working capital" word by word. Those definitions decide the final number. A few days before closing, the seller's lenders send payoff letters. At closing, the buyer usually sends money straight to the lenders and the rest to the seller.
After closing, there is often a "true-up". Within a set number of days, both sides check the real closing balance sheet. The price then moves up or down.
In small deals done as asset sales, the effect is similar. The buyer buys the assets, not the company, and the seller pays off its own loans from the proceeds. Liens must be cleared before an SBA lender will fund.
Common mistakes
Treating the headline price as take-home pay. Sellers plan a retirement on the offer number. Run the formula on your own balance sheet before you sign an LOI.
Leaving debt-like items vague. Customer deposits, deferred revenue, unpaid taxes and accrued bonuses can each cost real money. Ask for the list early, not in the last week.
Draining working capital. Some sellers collect every receivable and delay every bill before closing. The working capital adjustment simply takes that money back from the price.
Forgetting trapped cash. Some cash is needed to run the business, such as a minimum balance or customer deposits. Buyers may argue it should stay. Agree on this in writing.
Tax and legal treatment varies by deal, so talk to a lawyer and a CPA before you sign. If you want a second view on an offer, book a free call.
Questions people ask
What does debt-free cash-free mean in simple terms?
The buyer pays for the business without its cash or its debt. The seller keeps the cash and uses part of the price to pay off its loans at closing.
Who pays off the debt in a debt-free cash-free deal?
The seller does, out of the purchase price. In practice the buyer often wires the payoff amount straight to the lenders at closing and pays the seller the rest.
Does the seller keep the cash in the business?
Usually yes. The seller either takes the cash out before closing or the price rises by that amount. Some buyers ask for a minimum cash balance to stay, so check the purchase agreement.
Is debt-free cash-free the same as enterprise value?
Close. The headline price in a debt-free cash-free offer is roughly the enterprise value. The seller's proceeds are the equity value, after adding cash and subtracting debt, debt-like items and any working capital adjustment.
Sources
- orrick.com — https://www.orrick.com/en/tech-studio/insights/What-Does-Cash-Free-Debt-Free-Mean
- investopedia.com — https://www.investopedia.com/terms/e/enterprisevalue.asp
Pober, M. (2026). What is debt-free cash-free? Definition, formula and example. Acquisitions.com. https://acquisitions.com/blog/what-is-debt-free-cash-free/
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