A cash-free, debt-free price is a pricing convention, not a description of what happens on closing day. Settling the actual cash and debt takes a specific, ordered sequence.
Key takeaways
Pricing a business on a cash-free, debt-free basis — see the glossary entry on the convention for the pricing mechanics — settles what the headline price assumes. It says nothing about the mechanical steps that actually move the target’s real cash and pay off its real debt on the day. That sequence has its own order, and getting it wrong on closing day is what turns a clean sweep into a delayed one.
On a healthy-company acquisition, the sequence a closing agent typically runs is: the buyer’s funds arrive, adjusted for the working-capital mechanism the purchase agreement sets — see choosing between completion accounts and a locked box for how that adjustment is calculated. A portion is released immediately to discharge any interest-bearing secured debt, using a payoff figure the existing lender confirms in advance. Any holdback or escrow amount is withheld per the purchase agreement’s terms — see escrow agents and release conditions. What remains flows to the seller. The target’s own operating cash on hand is handled separately, per the cash-free convention: retained by or swept to the seller, or netted against the price, depending on how the agreement defines it — but in every case, defined in the agreement before closing day, not decided on it.
Repaying a secured lender and discharging its registration are two different acts, and only the second one clears the target’s file. British Columbia’s PPSA — representative of the common-law provinces’ registration scheme — addresses this directly in Part 3, Perfection and Priorities, which includes both a provision on security interests in proceeds and a distinct amendment-or-discharge-of-registrations provision. Until that discharge or amendment is actually filed, the public registry keeps showing the old lender as a secured party against the target, regardless of whether the debt was repaid in full at closing. A buyer’s new lender, wanting a clean first-priority position, will typically want either a simultaneous discharge filing or an escrowed payoff undertaking from the old lender at closing — not a promise that the discharge will follow eventually. Run a PPSA registration search early enough in diligence that a surprise registration does not threaten the sweep on closing day itself.
Where the seller is a non-resident of Canada, the sweep runs through a mandatory statutory withholding, not just the parties’ own agreement. ITA s.116 requires a purchaser acquiring taxable Canadian property to remit tax within 30 days after the end of the month of acquisition unless the Minister has issued a clearance certificate. The standard rate is 25% of the amount by which the purchaser’s cost exceeds any certificate limit; for certain property types under s.116(5.2) — including depreciable property and Canadian resource property — the rate rises to 50%. In practice, that means a buyer closing with a non-resident seller either sees a certificate in hand before releasing full funds, or withholds a material fraction of the price and remits it directly, rather than sweeping the full amount to the seller and sorting out the tax exposure afterward.
A micro-deal debt sweep usually clears a single bank or CSBFP term loan. Deavo's own capital-stack table shows the debt side getting layered as deal size grows: at mid-market scale, $5 million to $30 million, the senior piece runs “at ~10%,” roughly 3.0 times EBITDA, with a mezzanine layer of about 1.0 times EBITDA “at 8–12% (+PIK)” stacked above it. A cash and debt sweep at that scale is not one payoff figure but several, negotiated and confirmed with each lender in the stack separately, often with an intercreditor agreement governing the order in which each is repaid and released. The same PPSA-discharge discipline applies to every layer — a mezzanine lender's registration has to come off the registry just as a senior lender's does, and the intercreditor terms typically dictate which lender's counsel controls the discharge timing relative to the others.
This sequence assumes a solvent, cooperative seller instructing its own lender to confirm a payoff figure. A distressed target runs on a different clock entirely: under BIA s.244(1)–(2), a secured creditor intending to enforce against “all or substantially all” of an insolvent debtor’s inventory, receivables or other property must send a notice of intention and then “shall not enforce the security… until the expiry of ten days after sending that notice.” That statutory notice period has no equivalent in an ordinary healthy-company closing, where the lender is cooperating rather than enforcing — a useful contrast for confirming which process actually applies to a given deal before assuming either sequence by default.
A platform agrees to buy a target for $2,000,000 on a cash-free, debt-free basis, subject to a working-capital adjustment. At closing, the target carries $150,000 of operating cash and $600,000 of secured term debt to a Canadian bank. The buyer wires $2,000,000, adjusted per the working-capital mechanism; $600,000 is released directly to the existing lender against a confirmed payoff figure, with the discharge of its PPSA registration filed the same day; a $100,000 holdback is retained per the indemnity terms; the remaining $1,300,000, less the holdback, flows to the seller. The $150,000 of operating cash is swept separately to the seller under the cash-free convention, since the $2,000,000 price already assumed the business would arrive without it.
Under a cash-free, debt-free price, the target's operating cash is generally retained by or swept to the seller, or netted against the price -- the purchase agreement should define exactly which, and it is not something a closing-day sweep decides on its own.
The public registry continues to show the old secured party until an amendment or discharge is actually filed, regardless of repayment. That is why a buyer's new lender typically wants a simultaneous discharge or an escrowed payoff undertaking, not a promise the discharge will follow.
Yes, materially. Absent an ITA s.116 clearance certificate, the buyer must withhold 25% of the purchase price (50% for certain property types) and remit it, rather than sweeping the full sale proceeds to the seller.
Where the ETA s.167 election applies, goodwill is carved out separately under s.167.1 -- consideration reasonably attributed to goodwill 'shall not be included in calculating the tax payable' on the supply, so that portion of the sweep does not carry a tax component at all.
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