"Cash Free, Debt Free" vs. Working Capital Allocation

searcher profile

May 04, 2024

by a searcher from Brigham Young University in Kahului, HI, USA

Can anyone share any insight into why there is such regular confusion in the M&A and Broker community related to "Cash Free, Debt Free" acquisitions and whether they include any allocation for working capital?

It is tempting for me to try to pin it on SMB arena and asset purchases vs. private equity and stock purchases, but in my experience it isn't that simple. I keep running to people at all levels that play it both ways. One of the truly confusing things about it is that most people have only ever done it one way or the other and are shocked/defensive that it is even a point of question.

Maybe I'm the only one...

4
23
357
Replies
23
commentor profile
Reply by a searcher
from Michigan State University in Kalamazoo, MI, USA
from my experience it isnt "vs" but both. I bought a small business recently via asset sale where at close, the seller kept all the cash in his bank account and paid off all debt (cash free, debt free). We also set a working capital peg based on the average of the prior 12 months. Working capital = AR + Inventory - AP.

I think the big point of confusion is that working capital IS NOT cash. it is the "stuff" that is "stuck" in the business at any given moment.
commentor profile
Reply by a searcher
in Honolulu, HI, USA
There's confusion when a guru or teacher says you NEED to do it this one way. Personally, I'd take the stock and liabilities any day... Provided it includes enough working capital. With a CFDF deal, you need to be well capitalized, but you'll be able to negotiate a better deal.
commentor profile
+21 more replies.
Join the discussion