Disputed Net Debt Items: How to Argue Your Position
How to argue disputed net debt items in M&A deal negotiations: the methodology, evidence required and how to present your position to lawyers and clients.
Every M&A deal has disputed net debt items. Once the headline enterprise value is agreed, the parties turn to the balance sheet — and the negotiation over which items reduce equity value can be intense. As a TS adviser, your role is to identify disputed items, build the analytical case for your position, and support your client in deal negotiations.
Why Net Debt Disputes Arise
Net debt disputes occur because the definition of "net debt" in an SPA includes subjective judgements:
- What constitutes "financial debt" vs. "normal operating liabilities"?
- Which provisions are debt-like and which are part of working capital?
- What is the correct treatment of IFRS 16 lease liabilities?
- Is deferred revenue a debt-like item or an NWC item?
- What is the appropriate haircut for trapped cash overseas?
Each party's adviser will take positions that favour their client. The result is a negotiation that requires both technical knowledge and commercial judgment.
The Framework for Arguing Disputed Items
Step 1: Establish the Economic Substance
The strongest argument for including an item in net debt is economic substance:
- "This liability represents a definitive future cash outflow that the business must fund out of its operating resources."
- "The buyer will need to settle this obligation post-acquisition; it is economically equivalent to taking on debt."
For excluding an item:
- "This item is a normal operating liability that cycles through the business annually; it belongs in working capital, not net debt."
- "This contingent liability is too uncertain to quantify at this stage; it is addressed through warranty protections instead."
Step 2: Provide Evidence and Precedent
Support your position with:
- The underlying accounting policy for the item
- Historical patterns (has this liability always been on the balance sheet? At similar levels?)
- Market practice (how is this item treated in comparable transactions in this sector?)
- Legal advice on the nature and enforceability of the obligation
Step 3: Quantify the Item Precisely
Vague positions are easily challenged. Your argument should include:
- The exact balance at the reference date
- The methodology used to calculate it (particularly for pensions, provisions, or contingent items)
- A sensitivity analysis showing the range of possible values
Step 4: Anticipate the Counter-Argument
The best TS advisers anticipate the other side's position before negotiations begin:
- If you are arguing for inclusion: be ready for "this is a normal operating provision already reflected in NWC"
- If you are arguing for exclusion: be ready for "this liability is definitive and the buyer should not be expected to absorb it at no price adjustment"
Common Disputed Items and Standard Arguments
| Item | Buyer's Argument (Include) | Seller's Argument (Exclude) |
|---|---|---|
| Pension deficit | Real future cash obligation | Included in NWC or W&I insurance |
| Deferred revenue | Must perform service at cost | Normal operating item, already in NWC |
| Contingent litigation | Probable outflow | Uncertain, address via warranty |
| IFRS 16 leases | Contractual obligation per IFRS | Offset by EBITDA uplift already agreed |
Conclusion
Disputed net debt items require both technical rigour and commercial persuasion. Analysts who can present clear, evidence-based arguments — and anticipate counterarguments — make a significant contribution to deal outcomes.
The Transaction Services Interview Programme (€119.99, one-time) trains you to argue net debt positions with real deal scenarios and worked equity bridge exercises. Get started today.