Cash Free and Working Capital

February 24, 2026

by a searcher from Princeton University in Livingston, NJ 07039, USA

How do others structure their LOIs? Mine says cash free debt free but then includes a target amount of working capital. WC includes cash as a current asset. I understand the seller gets to keep excess cash but saying cash free feels wrong. Anyone have a solution?

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Reply by an investor
from Columbia University in Fairfax, VA, USA

^redacted‌ - You're right that most deals in this space are done on a cash-free, debt-free basis. So when you're calculating and setting your Net Working Capital peg, you'd exclude cash from the Current Assets and exclude debt from the Current Liabilities. For the LOI, you could use language along the lines of: "The Purchase Price assumes the Company will be delivered at Closing with a normalized level of Net Working Capital sufficient to operate the business consistent with its historical operations, estimated to be between $[x] and $[x]. The final target amount and a customary dollar-for-dollar adjustment will be determined following Buyer’s review of monthly balance sheet information during due diligence." I'm a big fan of including an estimated range for NWC in the LOI, assuming you have Balance Sheet data. Two reasons why it's helpful: 1) It anchors the seller to the fact that NWC will be factored into the deal (in a way that just saying "normalized level of NWC" doesn't). 2) You may get a reaction from the seller or broker that will help you further refine the quality of the deal and what your NWC peg should be.

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

^redacted‌ You are asking if cash is included in WC. First level answer is NO. Having said that there are times when cash is included, but even in these cases it is not transferred to buyer. Despite all that, buyer should have additional liquidity b/c it is unlikely the buyer can run the business like the seller on day-1. In my 35+ years as M&A broker, WC is nailed down in all LOIs with zero ambiguity. None of the WC paragraphs above are adequate to protect the seller or the buyer. A big problem with small deals is whether WC is included in price expectation of seller/broker. It should be included. Deft-Free, Cash-Free (DFCF) is a high-level definition. The objective is that the buyer should not have to infuse cash post-closing. In reality Cash-Free is truly not cash-free, and debt-free is really free of not only debt and but also free of debt-like liabilities. I teach the WC subject. I have helped few WC-related broken deals involving Big 4 and regional leading CPA firms. I wish I could simplify a complex subject here. Happy to help.

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