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How are outstanding debt and excess cash treated when a company is sold?
How the cash-free, debt-free standard works, what counts as debt, and how the working capital peg changes the amount you receive.
By Michael D. Rubin, CEO & Founder · September 2026 · 888 words
Most private companies are sold on a cash-free, debt-free basis: the owner keeps the excess cash, the company's debt is paid off from the proceeds at closing, and the buyer receives a normal level of working capital. The price a buyer quotes is for the business as an operating engine, not for the money in its bank account or the loans on its balance sheet.
That is why the headline number in an offer and the amount wired to you at closing are rarely the same. Understanding the gap before you sign a letter of intent protects you from an unpleasant surprise at the closing table.
The headline price is not the check you receive
The price in most offers is enterprise value: what the buyer pays for the operating business. From that figure, the company's debt and debt-like obligations are subtracted, and an adjustment is made if working capital comes in above or below the agreed level. What remains, before taxes and transaction costs, is the equity value that reaches the owner. The figures below are an illustration only.
| Line | Illustration | What it means |
|---|---|---|
| Enterprise value (headline price) | $12,000,000 | The price for the operating business |
| Less bank debt and equipment loans | -$1,500,000 | Paid off from the proceeds at closing |
| Less other debt-like items | -$300,000 | For example unpaid bonuses, or customer deposits for work not yet done |
| Working capital adjustment | -$200,000 | Working capital delivered at closing came in below the peg |
| Proceeds to the owner | $10,000,000 | Before taxes and transaction costs |
What counts as debt, and what gets argued about
Bank loans, lines of credit, equipment financing and loans from the owner are clearly debt. The negotiation happens over debt-like items: obligations that are not called loans but will cost the buyer cash after closing. The usual candidates are listed below, and each one is worth identifying before a buyer does.
- Customer deposits or deferred revenue for work the buyer will have to perform without being paid again
- Bonuses, commissions or paid time off that employees have earned but not yet received
- Finance leases on equipment and vehicles
- Income taxes owed for periods before closing
- Payables stretched well beyond normal terms, or maintenance that has been put off
The working capital peg
Working capital is roughly what the business needs to run day to day: receivables plus inventory, minus payables and other short-term obligations. A buyer expects to receive a normal amount of it, because otherwise it would have to put cash into the company on day one. The working capital peg is the target level both sides agree on, usually based on an average of recent months so seasonal swings do not distort it.
At closing, actual working capital is measured against the peg. Deliver more and the price goes up; deliver less and it goes down, usually with a true-up a few months later once final numbers are in. Where the peg is set is a real negotiation worth real money. It belongs in the letter of intent, not left for the lawyers to discover in the final weeks.
Excess cash: take it out or get paid for it
Cash above what the business needs to operate is normally yours. Most owners distribute it before closing, on their CPA's advice about timing and tax. If you leave it in, the purchase agreement should say the buyer pays for it dollar for dollar. Be careful not to strip out cash that is really working capital, such as the money needed to fund payroll the week after closing; that will show up as a shortfall against the peg.
Your CPA should advise on how and when to take cash out, and your transaction attorney should check how the purchase agreement defines cash, debt and working capital. Those three definitions often matter as much as the price itself.
If the company has a line of credit, expect it to be paid off and closed at closing, and ask your banker early for a payoff letter so the figures are final. Any personal guarantees you signed on company debt should be released at the same time; your attorney should confirm the release in writing.
Mistakes that shrink the check
Owners rarely lose money on the headline price. They lose it in the details:
- Comparing offers on headline price without adjusting for how each buyer defines debt and sets the peg
- Letting the buyer base the peg on the company's seasonal high point
- Forgetting equipment loans or leases held in the owner's name but used by the business
- Assuming customer deposits are yours to keep when the work has not been done
How we handle it at MDR & Associates
We build the net-proceeds picture early. In the financial recast we identify debt, debt-like items and a normal working capital level before buyers see the company, so there is less to argue about later. When multiple letters of intent arrive, we translate each one into what you would actually receive and review it with you in person; our guide to comparing offers shows the method. A principal of the firm stays in the negotiation through the purchase agreement, working with your attorney and CPA, as set out in our process.
To see where your company's value might start, begin with a free valuation snapshot, or read how our sell-side representation works.
Where this fitsTexas M&A advisors and business brokers →