Cash-free, debt-free: why the headline price is not what you receive.

How the mechanism works

The buyer offers an enterprise value, normally derived from maintainable earnings and a multiple, as set out in how a business is valued before sale. Cash and debt are then measured at a defined point and converted into a price adjustment. Surplus cash increases the amount payable to shareholders because it belongs to them and the buyer does not need it to run the business. Borrowings reduce it, because the buyer is either repaying them at completion or inheriting them.

There are two common measurement routes. Under completion accounts the position is measured after completion and the price is trued up once the figures are agreed, which is accurate but leaves the final number open for a period. Under a locked box the price is fixed on an agreed historic balance sheet and the seller undertakes not to extract value between that date and completion, usually with a charge for the intervening period. Both are respectable. The locked box gives certainty earlier and depends on the quality and recency of the reference accounts.

Working capital is dealt with by a separate mechanism, because cash and debt alone do not tell a buyer whether the business can trade normally the day after completion. Those two mechanisms interact, and they are explained together in working capital adjustments.

What counts as debt?

Debt in a transaction usually extends beyond obvious bank borrowings, and its scope is a matter of negotiated definition rather than accounting law. Buyers argue for a wide reading; sellers for a narrow one. Nothing on the list below is treated identically in every deal, and the classification of any particular balance should be agreed in writing with your own legal and accounting advisers before exclusivity.

The negotiating point is not whether a category is arguable, but when it is settled. Sellers should insist that debt-like items are a closed list, agreed in the heads of terms with examples attached, rather than an open category interpreted by the buyer's accountants once exclusivity is in place and the seller's alternatives have gone. Heads of terms and deal structure covers what belongs in that document.

What happens to cash?

Only genuinely surplus cash is added to the seller's proceeds, and the balance shown on the bank statement is rarely all surplus. Money held as customer deposits or advance payments, retentions on contracts, restricted balances, sums set aside for an imminent tax liability, and the cash the business needs to fund its normal working-capital cycle are all commonly excluded. A business that collects payment in advance should expect the buyer to argue that a substantial part of the balance is not available to extract, and should expect that argument to carry some weight.

Extracting cash before completion, usually by pre-completion dividend, is often possible subject to distributable reserves, the company's funding needs, the buyer's agreement and the shareholders' own tax position. It changes the shape of the bridge rather than creating value: cash taken out is cash no longer added back. The reverse move is worse. Repaying company borrowings from personal funds converts the shareholders' own money into a reduction of the buyer's deduction, which is an expensive way to tidy a balance sheet.

An illustrative bridge

The figures below are hypothetical, chosen for clarity, and do not represent any transaction handled by EXITS.co.uk.

The same business, financed differently, would produce a different figure from an identical enterprise value. That is the point of the mechanism, and it is also why an owner comparing two offers should compare the bridge and not only the headline.

Where sellers get caught out

Five misunderstandings recur, and all of them are avoidable with early advice. The first is treating enterprise value as cash in the bank and planning around it, which turns an ordinary adjustment into a personal disappointment late in the process. The second is overlooking debt-like items entirely, particularly hire purchase, director's loans and accrued liabilities that never felt like borrowing.

The third is assuming every pound on the balance sheet is surplus cash, when a meaningful part of it is funding the trading cycle or belongs to customers. The fourth is not understanding how completion accounts operate: who prepares them, what period the seller has to review them, what supporting detail they are entitled to, and how a disagreement is resolved. The fifth, and the most costly, is discovering the definitions after exclusivity has been granted, at the point where walking away means writing off the fees already incurred.

One further trap is technical but expensive: allowing the same item to be deducted twice, once as a debt-like item and again through the working-capital calculation. Accrued bonuses, deferred income and tax provisions are the usual candidates. Whichever mechanism deals with them, they must be excluded from the other, and the working-capital target must be built on exactly the same definitions as the debt list.

What to settle before heads of terms

Ask for the definitions in writing, with a worked example applied to your own most recent balance sheet. Establish whether the deal is on completion accounts or a locked box, and what that means for the date the risk transfers. Agree who prepares the numbers, the review period, and the dispute route. Where part of the consideration is deferred or conditional, read the bridge alongside earn-outs and deferred consideration, because the two together determine when money actually arrives.

If you are at the stage of wanting a view on the underlying number rather than the mechanism, request a business valuation. If you want the mechanism handled for you as part of a managed process, that is what selling your business describes.

Who keeps the cash in a business sale?

On a cash-free, debt-free basis the shareholders keep surplus cash, either by taking it out before completion where that is permissible or by having it added to the price. The qualification is the word surplus. Cash required to fund the ordinary trading cycle, customer deposits, contract retentions, restricted balances and sums earmarked for imminent tax are all commonly excluded, and the boundary is negotiated rather than obvious.

Where a business habitually collects payment in advance, expect a firmly argued position from the buyer that much of the bank balance is other people's money in economic terms, even though it sits in the company's account. Sellers in subscription, deposit-taking or long-contract businesses should raise this early, because discovering it during diligence turns a definitional point into a perceived concession.

Is a director's loan account treated as debt?

Where the company owes money to a director or shareholder, the balance is almost always treated as debt and deducted from the enterprise value, because the buyer is inheriting an obligation to pay the outgoing owner. It is normally repaid at completion out of the proceeds, so the seller receives the same money by a different route rather than losing it. Where the director owes money to the company, the balance is usually treated as an asset and must be cleared or accounted for.

The point that catches owners is not the classification but the accounting. A loan account that has drifted for years, been used for mixed personal and business expenditure, or never been properly documented becomes a diligence problem out of all proportion to its size. Clean it up, evidence it, and take your accountant's advice on the tax treatment of clearing it, well before a buyer sees the ledger.

How does a cash-free, debt-free basis affect the tax position?

The structure changes how the consideration is composed, and the composition can affect the shareholders' tax outcome, but the analysis belongs to the seller's own accountant rather than to the transaction documents. Extracting cash by pre-completion dividend and receiving the same value as share consideration are different events with different treatments, and the right answer depends on the shareholders' individual circumstances and the legislation in force at the time.

The practical rule is to obtain that advice before the heads of terms fix the structure, not afterwards. By the time the share purchase agreement is being drafted, the shape of the consideration is difficult to change without reopening commercial terms, and a seller who asks the question late frequently finds that the most efficient route is no longer available. Rates and reliefs for share disposals change, and current rates should be confirmed with an adviser rather than assumed from anything read online, including here.

Where to start

The mechanism only matters once there is a number to apply it to — request a confidential valuation or read how the wider process runs in selling a business. Further reading on how UK companies are valued is collected in the business valuation Insights archive.

This page is general information about the law and tax treatment of business sales in the United Kingdom as at 9 August 2026. It is not personal advice, and the treatment of any particular transaction depends on how the deal is structured, the shareholders' own circumstances, the status of the company, the legislation in force at completion and the interpretation of your own accountant and solicitor. Take advice on your own facts before acting.