Net Debt in Financial Due Diligence: A Complete Definition
A complete guide to net debt in Financial Due Diligence: components, calculation, debt-like items, cash-like items and the EV/Equity bridge.
Net debt is one of the most tested concepts in a Transaction Services interview. Almost every candidate can give a basic definition. Far fewer can walk through all its components — and that's where the interview is won or lost.
The basic definition
Net debt is calculated as:
Net Debt = Financial Debt – Cash and Cash Equivalents
It serves as the bridge from Enterprise Value (EV) to Equity Value. If you're buying a business at EUR 10m EV and it carries EUR 2m of net debt, you're paying EUR 8m for the shares.
Financial debt components
In an FDD context, "financial debt" is broader than just bank loans. A complete answer includes:
- Bank loans: drawn term facilities, any revolving credit facilities (RCF) that are utilised.
- Bonds and notes: corporate bonds, convertible notes.
- Finance leases (IFRS 16 leases): since 2019, operating leases are capitalised on the balance sheet, creating a lease liability that forms part of net debt — provided the EBITDA reference is calculated on a post-IFRS 16 basis.
- Shareholder loans / intercompany debt: often treated as debt if not formally subordinated.
- Earn-outs payable: on past acquisitions made by the target.
Debt-like items
Beyond formal financial debt, a Transaction Services professional looks for debt-like items — liabilities with an economic effect similar to debt:
- Unfunded pension deficits: a defined benefit obligation not covered by a dedicated fund.
- Tax liabilities: identified during the tax due diligence — notified reassessments, likely exposures.
- Undeclared dividends: dividends declared but not yet paid.
- Onerous contracts: contractual penalty provisions with high probability of crystallisation.
Cash-like items
Similarly, some assets behave like cash from the buyer's perspective:
- Recoverable tax credits (research credits, VAT refunds due).
- Refundable deposits.
- Liquid short-term investments.
The most common interview trap
Many candidates include working capital items (trade payables, accruals) in their net debt calculation. This is wrong. Trade payables belong in the working capital analysis, not in financial debt. Confusing the two in an interview signals a fundamental gap.
Why it matters
A net debt calculation that misses a EUR 1.5m unfunded pension deficit or forgets to include a EUR 800k earn-out payable has a direct effect on the equity price. At a 7x multiple, even a EUR 300k error in normalised EBITDA moves the price by EUR 2.1m — but a net debt error moves it pound for pound.
The training programme includes full EV-to-Equity bridge exercises across multiple case studies, with all components modelled on real transaction data.