Stupid question

Very basic question but it is very confusing - when you're talking about the value of debt for a company (say in enterprise value) does the debt refer to money the company owes, or money the company is owed?

If it refers to money the company owes - why would a buyer pay for that? And how is that used for financing? Thanks!

 

You talk about net debt (debt -cash) and that debt is your obligations.

Buyer doesn't "pay for" debt, he just takes responsibility for or assumes that debt. Normally debt would be refinanced pro-forma (in an M&A context)

 
Best Response

I think I know where you're confused. It's a good question, one that confused me when I first learned about deals. But, I'm still learning so someone correct me if I'm wrong here. This is how I think about it:

Remember assets = liabilities + equity. So, every dollar of assets is reflected on the right side of the balance sheet by a dollar of equity or debt. So to buy an entire company, and take over its all its assets, you must pay off ALL owners of capital, which includes both debt and equity capital holders. On a side note, if a co's assets are, lets say $1000 for example, you don't neccessarily just pay a flat $1000 for the assets, reason being that ,in buying a company, you're paying for the present value of future cash flows. That present value will very likely be a higher than the value of the company's $1000 of assets.

 

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