background
Welcome to Wall Street Prep! Use code at checkout for 15% off.
Wharton & Wall Street Prep Certificates
Now Enrolling for September 2024 for September 2024
:
Private EquityReal Estate Investing
Buy-Side InvestingFP&A
Wharton & Wall Street Prep Certificates:
Enrollment for September 2024 is Open
Wall Street Prep

Cash-Free Debt-Free (CFDF)

Guide to Understanding the Cash-Free Debt-Free (CFDF) Transaction Structure

Last Updated May 1, 2024

Learn Online Now

Cash-Free Debt-Free (CFDF)

How Do Cash-Free Debt-Free Basis Transactions Work?

In M&A, the term “Cash-Free Debt-Free” simply means that when an acquirer purchases another company, the transaction will be structured such that the buyer will not assume any of the debt on the seller’s balance sheet, nor will the buyer get to keep any of the excess cash on the seller’s balance sheet.

From the perspective of the seller, a cash-free debt-free (CFDF) transaction results in the following implications:

  • Seller Retains Excess Cash ➝ The seller retains the excess cash on their balance sheet at the time of closing, except for a usually negotiated amount of “operating” cash that is considered a minimum amount that needs to transfer over in the sale to keep the operations of the freshly acquired business running smoothly.
  • Seller Liable for Existing Debt ➝ The outstanding debt obligations remaining on the seller’s balance sheet must be paid off in full by the seller.

What is the Structure of a Cash-Free Debt-Free Transaction?

The purchase price delivered to the seller is the enterprise value in M&A deals structured as cash-free-debt-free (CFDF).

If an M&A transaction is structured on a cash-free, debt-free basis, the enterprise value is implied to equal the purchase price.

Because the acquirer does not have to assume the seller’s debt (nor get the benefit of the seller’s balance sheet cash), the acquirer is simply paying the seller for the value of the core operations of the business, i.e. the enterprise value.

In CFDF deals, the purchase price delivered to the seller is simply the enterprise value (TEV).

By contrast, in an acquisition where the acquirer acquires all the seller’s assets (including cash) and assumes all the liabilities (including debt), the purchase price delivered to the seller would need to be adjusted by taking the enterprise value and subtracting out the seller’s existing net debt and purchasing just its equity.

The Wharton Online
and Wall Street Prep Private Equity Certificate Program

Level up your career with the world's most recognized private equity investing program. Enrollment is open for the Sep. 9 - Nov. 10 cohort.

Enroll Today

How to Negotiate Cash-Free Debt-Free Transactions?

In practice, most leveraged buyouts (LBOs) – i.e. the transactions that private equity firms specialize in – are structured on a cash-free debt-free basis (CFDF).

Frequently, the letter of intent (LOI) will contain language to formally establishes that the transaction structure will be on a cash-free debt-free basis (CFDF).

However, the definition of what counts as cash and debt is not finalized and negotiations may continue about this up until the close, making the cash-free debt-free basis structure a sometimes delicate point of negotiations.

For instance, suppose you are a seller thinking you’ll get to keep $5 million in cash, but the private firm argues that $3 million of that is intrinsic to the operations of the business and should come over with the company in the late stages of the deal.

Learn More → Issues in Negotiating Cash-Free Debt-Free Deals (PDF)

Cash-Free Debt-Free Transaction Calculator

We’ll now move to a modeling exercise, which you can access by filling out the form below.

dl

Get the Excel Template!

By submitting this form, you consent to receive email from Wall Street Prep and agree to our terms of use and privacy policy.

Submitting...

1. CFDF Transaction Assumptions

Suppose WSP Capital Partners, a private equity firm, seeks to acquire JoeCo, a coffee wholesaler and retailer.

WSP Capital Partners believes JoeCo deserves an enterprise value of $1 billion, representing 10.0x JoeCo’s last twelve months (LTM) EBITDA of $100m.

  • Enterprise Value = $1 billion
  • Purchase Multiple = 10.0x
  • LTM EBITDA = $100 million

JoeCo has $200mm in debt on its balance sheet, along with $25m in cash on its balance sheet, of which $5m the buyer and seller jointly agreed to consider “operating cash” that will be delivered to the buyer as part of the sale.

  • Existing Debt = $200 million
  • Cash on B/S = $25 million
  • Operating Cash = $5 million
  • Excess Cash = $20 million

Note: Our illustrative LBO model will ignore all transaction and financing fees for simplicity.

2. LBO Cash-Free Debt-Free Transaction Example

Since the buyer is only buying the enterprise value, the buyer simply defines the purchase price as $1 billion, which is the enterprise value.

From the buyer’s perspective, since there’s $0 net debt that goes along with this newly acquired business, its equity value is simply $1 billion, i.e. the same as the enterprise value.

So, what happens to the debt and cash on the seller’s balance sheet?

The seller receives the $1 billion purchase price and pays off the $180m in net debt ($200m, net of the $20m in excess cash).

  • Purchase Enterprise Value (TEV) = $1 billion
  • Assumed Debt = $180 million
  • Excess Cash on B/S = $20 million
  • Equity Value = $1 billion  –$200 million + $20 million = $820 million

The proceeds to the seller amount to $820m, which is equal to the equity value.

  • Exit Proceeds to Seller = $1 billion  –$200 million + $20 million = $820 million

3. LBO Non-CFDF Transaction Example

In contrast, suppose the same LBO transaction was NOT structured on a CFDF basis.

So, how would things look like if the same LBO deal was instead structured such that the acquirer assumes all liabilities (including debt) and acquires all assets (including cash)?

Given the non-CFDF transaction assumption, the acquirer will assume all seller debt and gets all seller cash.

The enterprise value remains $1 billion, so enterprise value is NOT impacted.

Of course, this time, the buyer is not just buying the enterprise, the buyer also assumes the $200m in debt, slightly offset by $20m in cash. The acquirer is still getting the same business, just with a lot more debt.  So, all else equal, the buyer would define the purchase price as:

  • Purchase Equity Value = $1 billion – $180 million = $820 million

From the seller’s perspective, $820m is received rather than $1 billion, but the seller has no lenders to pay off.

Under either scenario – ignoring any tax or other nuances that usually create a preference for a cash-free debt-free structure (CFDF) – the two approaches are economically identical.

4. Cash-Free Debt-Free Transaction Analysis (CFDF)

Since most M&A deals are valued off EBITDA, the cash-free debt-free (CFDF) structure is conceptually simpler and aligns with how buyers think about the value of potential targets to acquire.

How so?

EBITDA is a measure of operating profitability independent of cash or debt. In fact, the EBITDA metric is solely a function of the businesses’ core operations, regardless of how much excess cash or debt is sitting on the company’s books.

In our JoeCo example, the 10.0x EBITDA entry multiple determines the purchase price, aligning the valuation with the purchase price from the acquirer’s perspective.

The exception to CFDF structure is when the target company is public (i.e. “go-privates”) or in larger mergers & acquisitions.

In conclusion, those types of M&A deals will not be structured as cash-free debt-free (CFDF). Instead, the acquirer will acquire each share via an offer price per share or acquire all the assets (including cash) and assume all the liabilities (including debt).

LBO Cash-Free Debt-Free Basis Structure (CFDF)

Comments
18 Comments
most voted
newest oldest
Inline Feedbacks
View all comments
Tina
March 31, 2023 8:33 am

Hi I have a quick question. If we are a CFDF basis, and the target had A$25m cash (o/w A$5m is minimum cash required and A$20m is excess cash). When we do Sources and Uses table, does it mean the A$20m excess cash is on the sources side to reduce… Read more »

Brad Barlow
April 1, 2023 6:17 am
Reply to  Tina

Hi, Tina, The $25m in cash would actually reduce equity value to enterprise value, not vice versa, because enterprise value is the value of core operations excluding cash, so that is the price we would pay in a CFDF transaction. So, it would not be a source of cash if… Read more »

Lan
February 5, 2024 7:16 pm
Reply to  Brad Barlow

“Seller Keeps Excess Cash → The seller retains the excess cash on their balance sheet at the time of closing, except for a usually negotiated amount of “operating” cash that is considered a minimum amount that needs to transfer over in the sale to keep the operations of the freshly… Read more »

Brad Barlow
February 13, 2024 3:05 pm
Reply to  Lan

Hi, Lan, If the minimum cash is included in the EV and transfers over, then you are correct, it would not be a uses of funds. However, if the seller walks away with all of the cash, then it would lower the purchase price EV by $5 and you would… Read more »

georges
May 1, 2024 8:27 am

If a public company has $2B Market Cap & $500m Cash, How much would an acquirer have to pay then? This is my thinking (& confusion) Approach 1 (as per the EV bridge): we calculate EV=1,500m. Analysis: Buyer pays 1,500m and doesn’t get the cash balance Seller gets 1,500m+500m (cash… Read more »

Brad Barlow
May 6, 2024 2:34 pm
Reply to  georges

Hi, Georges, Approach 1 is correct. A company with a market cap of $2bn will not be able to require that of the buyer and then say they are keeping the cash. The buyer, especially if it is a PE firm, is valuing the business apart from the cash and… Read more »

Filippo
January 20, 2024 5:19 am

Hello, in a CFDF deal, how do you treat assets such as buildings or investments which are not directly related to generating EBITDA?
Also, how would you treat a VAT credit?

Brad Barlow
January 22, 2024 7:12 pm
Reply to  Filippo

Hi, Filippo, The value of such assets would be included in the purchase price if they are transferred to the buyer, otherwise they are excluded along with cash and debt. Same for the VAT credit. If the benefit of it transfers, then it should be part of the purchase price.… Read more »

Filippo
January 24, 2024 1:04 pm
Reply to  Brad Barlow

Hi Brad, thanks for the response. In my case I have a buyer wanting to purchase 50% of the company and enter as a working partner. We have agreed on a multiplier for EBITDA but the part that i’m struggling with is how do we calculate the rest. They have… Read more »

Brad Barlow
January 28, 2024 10:44 am
Reply to  Filippo

Hi, Filippo, That sounds like a complicated situation, and I would need more facts to be able to reason it out consistently, and unfortunately we cannot give that level of response in this forum. Net Financial Position sounds to me something like the FMV of the assets and liabilities to… Read more »

Yvette
August 12, 2023 11:52 am

In the CFDF option what happens to the operating cash of $5M. Does that go to the buyer for WC?

Brad Barlow
January 28, 2024 10:46 am
Reply to  Yvette

Hi, Yvette,

Yes, the operating cash stays in the business as W/C, only the excess cash goes with the seller.

BB

Will
September 20, 2022 6:53 pm

Hi team, you indicate that Enterprise value is the the Cash Free Debt Free valuation as it already ignores the capital structure of the company. However, in practice for CFDF deals, it appears that firms typically take the Enterprise Value then deduct debt and add cash to arrive at the… Read more »

Brad Barlow
September 21, 2022 2:35 pm
Reply to  Will

Hi, Will, When you think of it from the acquirer’s perspective, the EV is the CFDF value, because it is what the acquirer gets from the seller, who has kept the cash and paid off the debt, so naturally, the acquirer is interested in what they have to pay for… Read more »

Will
September 22, 2022 10:16 pm
Reply to  Brad Barlow

Thanks Brad, appreciate the reply! I’m still unclear why acquirers in a CFDF transaction take the EV/CFDF valuation and then deduct debt and add cash to arrive at the actual purchase price if it is already CFDF. 1. In theory the adjusted purchase price is essentially the equity value but… Read more »

Brad Barlow
September 23, 2022 4:01 pm
Reply to  Will

Hi, Will, I too am used to using the term ‘purchase price’ to mean the purchase price of equity in a public company context. However, CFDF purchase price is indeed the agreed upon purchase price for the enterprise value of the company being purchased, not the equity value. The equity… Read more »

Chris
February 21, 2023 2:38 am
Reply to  Will

I actually had this same thought because this article is kind of confusing. Enterprise value includes the value of debt (minus cash), which is why it’s not double counting to remove it in a CFDF deal to get to equity value.

Brad Barlow
February 22, 2023 1:54 pm
Reply to  Chris

Hi, Chris,

That’s correct, in that the CFDF price being paid for the EV will presumably include enough for the seller to pay off the debt, and what is left (plus the excess cash) is the equity value to the seller.

BB

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.