The classic formula: Equity Value = Enterprise Value − Net Debt ± Working Capital Adjustment. Net debt appears straightforward but is frequently contested. Financial debt includes bank loans, shareholder loans, leases under IFRS 16, hire purchase agreements, revolving credit facilities drawn at closing, and factoring balances. Items that are often overlooked by sellers but treated as debt by buyers: pension deficits, deferred tax liabilities (in asset deals), outstanding earnouts from prior acquisitions, and unfunded capex commitments.
Cash deducted from gross debt must be 'normalized' — meaning cash required to operate the business (the working capital floor) is excluded. If a business holds €2m of cash but €1.5m is needed to fund normal operations, only €500k is treated as surplus cash deductible from gross debt. This creates a second source of closing adjustment disputes alongside working capital.
For French SME sellers specifically, compte courant d'associé (shareholder current accounts — loans from the founder to the company) are almost always treated as financial debt by buyers, even if the founder had intended to leave them in. The seller should plan to withdraw or capitalize these before closing to maximize equity proceeds.
EV-to-equity bridge
Enterprise Value agreed: €20m. Less: bank loan outstanding €3m. Less: shareholder loan (CCA) €500k. Less: IFRS 16 lease liabilities €200k. Plus: surplus cash €400k. Net debt: €3.3m. Working capital shortfall at closing: €300k. Equity proceeds at closing: €20m − €3.3m − €0.3m = €16.4m. Before tax.
Frequently asked questions
Why do buyers treat operating leases as net debt?
Under IFRS 16 (and the French PCG for consolidation), operating leases are capitalized on the balance sheet as right-of-use assets and lease liabilities. Buyers treat the lease liability as debt because it is a fixed financial obligation that must be serviced regardless of business performance. For asset-light businesses with significant real estate or equipment leases, this can meaningfully reduce equity proceeds.
What is the difference between locked-box and completion accounts mechanics?
A locked-box mechanic sets the economic transfer date at a historical date (e.g., the last balance sheet date). The seller receives interest (a 'ticker') for the period between the locked box and closing, and no working capital or net debt adjustment is made at closing. A completion accounts mechanic adjusts price at closing based on actual net debt and working capital. Sellers generally prefer locked-box for certainty; buyers may prefer completion accounts for accuracy.
Can a seller reduce net debt before closing?
Yes: repay shareholder loans (CCA) before signing, pay down revolving credit, and ensure that cash balances are not artificially high through factoring or delayed supplier payments. Clearing net debt items before closing simplifies the adjustment mechanism and reduces the scope for post-closing disputes.