Net debt is the difference between a business's interest-bearing debt and its cash. The concept is central to any business deal, because it bridges the business's operating value and the amount the owner actually gets paid.
Short answer: Net debt = interest-bearing debt − cash (cash and bank balances). The higher the net debt, the more is subtracted from the business's enterprise value before arriving at equity value — the amount the owner keeps. See the relationship in enterprise value vs. equity value.
What counts as debt?
Typically bank loans, overdrafts, leasing debt and other interest-bearing debt. Ordinary, non-interest-bearing operating debt — like accounts payable, which is part of ongoing working capital — is normally kept outside the net debt calculation and instead handled through any working capital adjustment.
What counts as cash?
Cash balance and bank deposits that are genuinely freely available. If there are restricted funds (e.g. amounts deposited for a specific obligation), it should be specifically clarified in the negotiation whether they should be included.
Why is it often a source of disagreement?
The net debt calculation can seem technically simple, but in practice there's often negotiation over the details: should unpaid taxes or holiday pay obligations be counted as debt-like items? How are leasing agreements treated? It's exactly this kind of question that thorough due diligence and a clear agreement on the calculation method help clarify, before disagreement arises late in the process.
Locked box or completion accounts
When net debt (and working capital) is calculated — at a fixed point before the deal (locked box) or at closing itself (completion accounts) — is a separate negotiation point with major significance for who bears the risk of fluctuations in the period leading up to the transfer. We go deeper into this in a future, more specialized M&A piece.
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