Cash Free/Debt Free Basis
What does it mean when a target is acquired on a cash free / debt free basis? does it mean that the new owner needs to invest working capital for business operations?
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It means that the target (seller) keeps cash on their balance sheet at close and has to repay any outstanding debt obligations.
Working capital uses a negotiated target or peg and the purchase price is adjusted dollar-for-dollar based on the overage or insufficiency of what is delivered vs. the target/peg.
Mechanically, how it works:
Enterprise Value/Purchase Price +Cash -Debt +/-Difference in Working Capital = Proceeds to Shareholders at Close
Yep, since closing / signing are at different moments in time, this difference in WC should reflect an adjustment from negotiated price x balance sheet at the time of closing.
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