Net Debt: What Net Financial Debt Moves in the Purchase Price

Net debt is the interest-bearing financial debt of a company adjusted for liquid funds. It is not a pure balance sheet figure. In an M&A process, net debt is a contractually defined quantity. It determines how much of the agreed company value ultimately reaches the seller.

How net debt and company value interact in the most common multiple is set out in EV/EBITDA. How the definition is negotiated in the process is described in our sales process with a cleanly negotiated net debt definition.

Most purchase price surprises do not arise in the valuation. They arise in the definition. That is why it is worth understanding net debt early.

How is net debt calculated in a company sale?

Net debt is calculated by deducting the freely available liquid funds from all interest-bearing liabilities and those contractually agreed as debt-like. The basic formula is:

Net debt = interest-bearing financial liabilities + debt-like items − freely available liquid funds

Which balance sheet items belong in which basket is not regulated by law but is a matter of negotiation. The starting points, however, are provided by the classification scheme of the Commercial Code (Handelsgesetzbuch):

Balance sheet item	Reference	Usual classification in the net debt definition
Bonds, liabilities to banks	§ 266 para. 3 C. nos. 1 and 2 HGB	Debt
Advance payments received on orders	§ 266 para. 3 C. no. 3 HGB	disputed: working capital or debt-like
Liabilities to affiliated companies, shareholder loans	§ 266 para. 3 C. no. 6 HGB	Debt, repaid at closing
Other liabilities, of which taxes	§ 266 para. 3 C. no. 8 HGB	debt-like, insofar as periods before the reference date are affected
Pension provisions	§ 249 para. 1, § 253 para. 2 HGB	often debt-like, amount depends on the discount rate
Cash in hand, bank balances	§ 266 para. 2 B. IV. HGB	cash-like, insofar as freely available

Source: Handelsgesetzbuch, § 266 HGB, § 249 HGB, § 253 HGB, retrieved on 25.09.2026. The classification in the right-hand column describes the usual negotiating position, not a legal consequence.

The role in a company sale: cash and debt free

Most transactions run on a “cash and debt free” basis. That means: the operating business is sold, not the financing structure. The buyer takes over neither the seller's debt nor its surplus liquidity.

The agreed price for the operating business is the enterprise value (company value). What the seller actually receives is the equity value. Net debt is the bridge between the two.

Equity value = enterprise value − net debt (± working capital adjustment)

A company with high net debt yields a lower purchase price at the same enterprise value. How this bridge becomes robust even before the first offer is shown by the bridge from enterprise value to equity value in the business valuation.

What counts as debt-like and cash-like

The dispute in the detail decides the purchase price. Buyers often interpret the debt basket more broadly than pure bank debt. They often interpret the cash basket more narrowly than cash in hand.

Item	Usual classification	Reason
Bank loans, bonds	Debt-like	Interest-bearing financing
Shareholder loans	Debt-like	Repaid at closing
Pension provisions	often debt-like	Future payment obligation
Factoring liabilities	often debt-like	Liquidity brought forward
Unpaid bonuses, tax arrears	often debt-like	Deferred payments
Cash in hand, bank balances	cash-like	Freely available
Trapped liquidity	often not cash-like	Cannot be freely withdrawn
Minimum liquidity required for operations	often not cash-like	Needed for the ongoing business

The classification is not a calculation rule but a subject of negotiation. Whether a pension provision counts in full, in part or not at all as debt can move six-figure amounts. Which items a buyer is likely to push into the debt basket usually becomes apparent only in the financial due diligence on debt and debt-like items — better to know the list beforehand.

Pension provisions: why the discount rate moves the purchase price

Pension commitments are the most frequent point of dispute in net debt negotiations in the Mittelstand. The reason is arithmetical: the same obligation has a very different present value depending on the discount rate — and the law knows two rates side by side.

Yardstick	Discount rate	Source, as of
Commercial balance sheet, 10-year average, remaining term 15 years	2.22 %	Deutsche Bundesbank, discount rates under § 253 para. 2 HGB, as of end of August 2026
Tax balance sheet	6.00 %	§ 6a para. 3 EStG
Present value of a payment of EUR 100,000 in 15 years at 2.22 %	around EUR 71,900	own calculation
Present value of the same payment at 6.00 %	around EUR 41,700	own calculation

Sources: Deutsche Bundesbank, discount rates 10-year average, § 6a EStG, both retrieved on 25.09.2026. Present value calculation simplified, without mortality and turnover probabilities.

The calculation shows the order of magnitude: in this simplified example the commercial-law value of the same obligation is a good 70 percent above the tax value. In the net debt definition, buyers generally do not apply the lower tax value but the commercial-law value or their own actuarial value. Sellers who calculate with the tax value miscalculate their net proceeds.

Two consequences for preparation: first, a current actuarial report belongs in the data room before a buyer prepares its own. Second, it is worth clarifying with the tax advisor whether commitments can be outsourced or settled before the sale — this is a tax and employment law question, not a purely commercial one.

Distinction from working capital

Net debt and working capital are two separate mechanisms. They must not be mixed.

Net debt concerns the financing side. Working capital concerns operating current assets: inventories, receivables, trade payables. Buyers usually set a target value (“peg”) for it. If actual working capital at closing deviates from it, the purchase price is corrected afterwards.

A risk arises if an item is counted twice, once in the debt basket and once in working capital. The classic example is advance payments received: if they are in the debt basket and at the same time as a liability in the working capital peg, the seller pays twice. Both definitions should therefore be kept cleanly separate and reconciled in a common annex to the purchase agreement.

What matters in the sale of wholesale and distribution companies — from distribution rights to working capital — is shown on our page Selling a wholesale business.

Reference date: locked box or closing accounts

When net debt is measured is the second major lever after the question of what is measured.

• Closing accounts (completion accounts): Net debt is determined as of the completion date, usually with a provisional figure at closing and a recalculation some months later. Advantage: the price reflects the actual position. Disadvantage: the recalculation is prone to dispute.
• Locked box: Net debt is fixed as of a past balance sheet date. From that date no value may flow to the seller any more (“leakage”), for instance through distributions or special payments. Advantage: price certainty at signing. Disadvantage: the buyer demands a reliably audited reference-date balance sheet in return.

Which mechanism fits depends on the quality of the accounting and on the time between signing and closing. The details are described in Purchase price mechanics in a company sale.

An illustrative worked example

The following example is simplified and serves only as an illustration.

Item	Amount (example)
Enterprise value (agreed)	EUR 10,000,000
− Bank loans	− EUR 2,500,000
− Shareholder loans	− EUR 500,000
− Pension provisions (debt-like)	− EUR 400,000
+ Freely available liquidity (cash-like)	+ EUR 900,000
= Net debt	EUR 2,500,000
Equity value = EV − net debt	EUR 7,500,000

In this illustrative case net debt reduces the payout amount by EUR 2.5 million. A working capital adjustment is not taken into account here. Those who need a first order of magnitude for their own company can estimate the enterprise value before deduction of net debt and lay their own net debt list beside it.

Patterns from practice: where net debt regularly tips

Three constellations recur in sales processes of mid-sized companies. They are described here without reference to individual mandates.

1. The pension commitment to the shareholder-managing director. The seller knows the commitment from the tax balance sheet; the buyer revalues it under commercial law or actuarially. The difference appears only in due diligence — at a point when the enterprise value is already in the letter of intent. Remedy: an expert report before the start of the process, and regulate the pension item expressly in the letter of intent.

2. The seasonally high cash balance. A company with advance payments from customers has a lot of liquidity on the balance sheet date. The buyer argues that part of it is only borrowed and does not belong in the cash basket. Remedy: evidence average liquidity over twelve months and propose a minimum cash balance required for operations yourself before the buyer fixes it.

3. The shareholder loan repaid shortly before the sale. Those who have a shareholder loan repaid out of the company before closing do lower net debt, but take on a risk of challenge: under § 135 para. 1 no. 2 InsO such a repayment can be challenged if an insolvency petition is filed within one year afterwards. Repayment through the purchase price mechanics at closing is generally cleaner. The legal structuring belongs with the lawyer.

Net debt, working capital, cash and debt free: the calculation quantities of a purchase price bridge are briefly explained in the glossary of M&A terms.

Frequently asked questions

What is the difference between net debt and gross debt?

Gross debt is the sum of all interest-bearing liabilities. Net debt deducts the liquid funds from it. For the purchase price, net debt counts, because available liquidity arithmetically lowers the debt burden.

Why does net debt reduce my sale proceeds?

Because in a cash and debt free transaction the buyer takes over the business without your financing structure. The agreed enterprise value applies to the operating business. Your debt is repaid at closing and reduces the amount that flows to you.

Do pension provisions always count as debt?

Not automatically. In practice many buyers treat them as debt-like, because they represent future payment obligations. The discount rate is then decisive: under commercial law it stood at 2.22 percent at the end of August 2026 (Bundesbank, 15 years' remaining term), for tax purposes at 6 percent (§ 6a EStG). You should clarify the specific treatment with your tax advisor.

Are advance payments received debt for the purposes of net debt?

This is one of the most frequent negotiation points. Under commercial law they are shown among liabilities (§ 266 para. 3 C. no. 3 HGB). Whether they are treated in the purchase agreement as debt-like or as part of working capital is a matter of negotiation — what matters is only that they do not appear in both baskets.

When is net debt fixed?

The definition is negotiated early, usually in the letter of intent, and fixed in the purchase agreement. The specific amount is determined at the reference date: with closing accounts as of the completion date with a recalculation, with a locked box as of a past balance sheet date.

Can I reduce net debt before the sale?

In principle yes, for instance by paying down bank liabilities. For shareholder loans caution is needed, because a repayment in the last year before an insolvency petition can be challenged (§ 135 InsO). Also important is the clean distinction from working capital, so that no item has an effect twice.

How the agreed company value becomes the amount actually paid out is shown in Purchase price mechanics in a company sale.