In this blog post, I explore two key concepts that play a vital role in shaping successful business sales: cash-free/debt-free (CFDF) and “pound for pound” re cash.
I see these terms bandied around a lot, particularly by corporate finance / deal advisory firms. My typical clients have never sold a business before and while vastly experienced in business, perhaps haven’t come across the terminology or jargon used. So in what might be a regular series or not (!) I attempt to break down some of the key terminology when buying or selling a business.
Cash-Free/Debt-Free (CFDF) Explained:
CFDF is a commonly used term in M&A that describes a deal structure where the target company is sold without any cash or debt on its balance sheet. In essence, the buyer acquires the company’s core operations and assets, excluding cash and debt.
Practically speaking, this means the seller will be asked to use the funds in the company to repay any debt and then if there’s cash left, on completion the seller will effectively get that although it is usually paid for by the buyer on a pound for pound basis.
As an example, I recently had a client how had a car on hire purchase and a bounce back loan. We were selling for say £1m, and there’s say £150k cash in the bank. Prior to completion, the car finance is repaid and the bounce back loan repaid so that there is no debt. Any remaining cash in the bank is then paid for by the buyer on completion, so the seller can extract is efficiently.
Benefits of CFDF:
- Provides a “clean slate” for the buyer, avoiding the assumption of the target company’s debt.
- Allows for easy comparison of multiple acquisition targets, as it focuses on the value of underlying assets and operations.
Pound for Pound Re: Cash Explained:
“Pound for pound” re cash is a phrase used to describe a scenario in which the buyer compensates the seller for the cash left on the target company’s balance sheet. The buyer pays an amount equal to the cash on hand (“pound for pound”) in addition to the agreed-upon enterprise value of the target company.
Example: If Company A acquires Company B for an enterprise value of £500,000, and Company B has £100,000 in cash on hand, Company A would pay £600,000 in total (£500,000 + £100,000).
Conclusion:
Understanding the concepts of cash-free/debt-free and pound for pound re cash is crucial when analyzing and structuring deals in the UK M&A space. CFDF allows for a clear comparison of potential targets, while “pound for pound” re cash ensures the seller is fairly compensated for the company’s cash balance.
If you’re looking to sell your business, then get in touch with Steven Mather for a free no obligation chat.