In Australia, it is common for transactions to be priced on a cash-free, debt-free basis, assuming normal working capital in the business. The headline price is therefore adjusted for surplus (or deficient) working capital, excess cash and debt assumed by the vendor.

There is no universal definition of working capital, cash or debt, and these items must be negotiated between the vendor and purchaser as early as possible to avoid complications further into the transaction. We typically recommend defining these terms as early as the term sheet stage to avoid disputes during the share sale negotiation or completion stages.

So, what items should be considered as cash, debt and working capital?


Cash is the simplest item to define, with one or two exceptions. Depending on the type of business, consideration should be given to the level of operational cash required in the business which may be required to fund any working capital deficiencies, as a result a “cash free” transaction is not totally cash free. The level of operational cash can be a heavily contested item and should be agreed between the parties as early in the transaction as possible. Another group that comes under scrutiny are rental deposits, these items tend to be included within working capital, however some people will argue they are cash.


Debt includes traditional debt such as interest-bearing loans, overdrafts and shareholder loans, but may also include other “debt-like” items where the business has an obligation to another party. Examples include deferred revenue, where the business has received cash in advance and is obligated to deliver goods or services to customers in the future period, and other accrued expenses. Debt and debt like items are included in the calculation of net cash to ensure the purchaser has enough cash remaining in the business to pay these amounts and will not be required to inject additional capital in order to fund existing liabilities of the business. Company taxation is often included as a debt item as it is lumpy and typically paid quarterly. GST, PAYG and payroll tax are usually included withing working capital and not debt.

Working capital

Working capital includes items available to fund the day to day operations of the business and is required to run the business. Typically, working capital will always include items such as trade debtors, inventory, work in progress, prepayments, trade creditors and accruals. In practice, working capital often includes all current assets and liabilities which are not separately identified as cash or debt. The working capital adjustment is calculated in reference to a target amount which needs to be negotiated between the parties. While the target working capital may only be determined during due diligence, deciding what items are classified as working capital is best dealt with in the term sheet for the transaction. The calculation of the target amount is usually in relation to historic trends, however in growing businesses, it is not un-common to require increased working capital at completion to fund the projected growth.

Opinions on the definition of cash, debt and working capital will always vary between the vendor and purchaser, however it will generally revolve around the idea of what minimum levels of working capital and cash is required to run the business from the time the transaction occurs. At completion of the transaction, the cash, debt and working capital adjustment mechanisms which are agreed between the parties will either increase the headline price if a greater level of working capital and/or cash is in the business, or decrease the price if working capital and/or cash levels have fallen below the agreed minimum, thus allowing the purchaser to pay the appropriate price for the business being acquired.

At HLB Mann Judd, we have extensive transaction advisory experience for vendors and purchasers, from initial negotiations through to finalising the transaction. Please reach out if you have any questions or would like further information.