Cash-free / debt-free, explained

kamfaulkner
Sep 23
4 min read

What it means — and why it matters when buying or selling a business

If you're buying or selling a business, chances are you'll hear the term “cash-free / debt-free” early in the process. It’s a standard deal concept, but one that can create confusion, especially for first-time SME buyers or sellers.

In this short explainer, we’ll walk through:

What cash-free / debt-free really means.
How it works in practice (and what’s included).
The role of completion accounts.
How the price is adjusted after completion.
Common pitfalls to watch for.

What does "cash-free / debt-free" mean?

Cash-free / debt-free means the price you're paying (or receiving) for the shares in a company assumes that:

The company has no cash or surplus cash at the point of completion.
The company has no financial debt outstanding at that point either.

In other words, you're buying the business as if it's free of cash and debt. This lets the buyer focus on the value of the business itself, not its current bank balance or liabilities.

In reality, of course businesses always have some cash and some debt. That’s where the adjustment mechanism comes in.

How does it work in real life?

In practice, the seller is usually allowed to extract surplus cash before completion, for example, by:

Paying a dividend.
Repaying director loan accounts.
Making pension contributions (if an individual seller).
Using cash to settle debts.

And any remaining debt (like overdrafts, loans, HP agreements, tax liabilities, etc.) are typically deducted from the price.

What counts as "cash" or "debt"?

There’s no one-size-fits-all list. But typically:

Definitions of cash and debt in a corporate sale transaction

What are completion accounts?

Completion accounts are a set of financial statements drawn up after completion. They show the actual cash and debt (and sometimes working capital or net assets) on the completion date.

These accounts are then used to adjust the purchase price. Here's how:

It’s usually a pound-for-pound adjustment, so every £1 of net cash increases or decreases the final price by £1.

This gives both parties a fair way to reflect the true position on the day the deal completes.

Why does this matter to SME buyers and sellers?

For sellers:

You can choose to extract cash or repay debt before completion, for example via dividends, loan repayments, or settling liabilities.
But you don’t have to; if cash or debt is left in the business, the purchase price will be adjusted based on the net cash/debt position.
Either way, it’s vital to get your estimates right, because any difference will result in a post-completion payment to or from the buyer.

For buyers:

You benefit from certainty, if the company ends up with more cash (or less debt) than estimated, you pay more; if the opposite, you pay less.
Completion accounts ensure the price reflects the true value on the day.
But it does mean extra work post-deal, and you'll want to make sure there’s a clear process for resolving disputes or delays.

In short: the cash-free / debt-free model gives flexibility, but both parties need to understand how it affects the headline price.

Who prepares the completion accounts?

Usually, it’s the buyer’s accountants who prepare the draft accounts, since they have control of the company after completion.

The seller’s accountants then review and agree (or dispute) them. If there’s a disagreement, the matter is escalated to an independent expert, often a chartered accountant appointed under the sale agreement.

What if you don’t use completion accounts?

Some deals use a locked box instead, where the price is fixed based on pre-completion accounts and there’s no post-deal adjustment.

For most SME transactions completion accounts are more common, because they reflect the actual position on the day of completion.

For more information see Completion Accounts vs Locked Box: What’s the Right Price Mechanism for Your Deal?

Key takeaways

Cash-free / debt-free means the buyer doesn’t inherit cash or debt, and the price adjusts accordingly.
Completion accounts are the tool used to calculate the final adjustment.
Definitions of "cash" and "debt" matter, and should be carefully reviewed.
The process takes time and effort post-deal, make sure you're prepared.
The right protections (e.g. retention or escrow) can help reduce risk for both sides but add complexity and cost.

Summary: what to do next

If you're preparing to buy or sell a business, get clear early on:

Will the deal be cash-free / debt-free?
If so, how are cash and debt defined?
Will completion accounts be used for the post-completion 'truing-up'?

Need help navigating cash-free / debt-free terms or completion accounts?

Whether you're buying or selling, we can help you understand what to extract, what to leave, and how the price will adjust.

Let’s talk through your plans:

📩 info@orbitlegal.co.uk | 📞 0115 6777095 |

Disclaimer

This content is for general information only and doesn’t constitute legal, accounting, financial, or tax advice. It’s based on the law of England & Wales and was correct at the date of publication, but the law and guidance can change. Reading this page doesn’t create a solicitor–client relationship with Orbit Legal. Please take advice on your specific circumstances before acting. Get advice for your situation by contacting Orbit Legal at info@orbitlegal.co.uk or 0115 6777095.