Pricing a deal on a cash-free, debt-free basis means the headline price assumes the target arrives with no cash and no interest-bearing debt — both are settled or excluded outside the price — alongside a normal, defined level of working capital.
Treadstone’s own explainer on working capital adjustments states the convention plainly: most private Canadian deals price a business “debt-free and cash-free with a normal level of working capital.” Because a business keeps operating between signing and closing, the actual cash, debt and working capital delivered at closing rarely matches what was assumed when the price was agreed — “the adjustment fixes that gap — and it is one of the most argued-over clauses in private M&A.”
The same source is careful about what the mechanism does and does not do: “the adjustment is not a substitute for the indemnity. It corrects the level of ordinary operating assets and liabilities.” A working capital shortfall against the agreed target gets trued up through the adjustment; a misrepresented balance sheet is a separate indemnity claim, and treating the two as interchangeable is a common drafting mistake on both sides of the table.
A platform agrees to buy a target for $10,000,000 enterprise value on a cash-free, debt-free basis, with a working capital target of $1,200,000 set from the trailing twelve months’ average. At closing the target actually delivers $950,000 of working capital — $250,000 short of target — so the buyer pays $9,750,000 instead of $10,000,000. The seller separately keeps the company’s $400,000 of cash and pays off its $600,000 term loan before closing; neither figure moves the $10,000,000 headline price, because cash and debt were never part of it.
See also: Leveraged buyout · Platform investment · Multiple arbitrage.
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