An offer of £10m on a cash-free, debt-free basis can quite properly end with £8.5m paid to the seller on completion day. Every adjustment in between will have been agreed in writing, usually in Heads of Terms the seller signed while still thinking about the £10m.

The buyer’s adviser has worked through those adjustments on dozens of deals. Most owners meet them once, part way through their own sale and after exclusivity has been granted, which accounts for most of the £1.5m. Each adjustment depends on a definition, and the side that knows which definitions carry money is usually the side that drafts them.

The sections below take one illustrative £10m deal and follow the adjustments in the order they reach the price.

What cash-free, debt-free actually means

On a cash-free, debt-free basis the buyer prices the trading business as though it held no cash and owed nothing to lenders. That figure is enterprise value. At completion the seller’s actual cash is added, debt and anything agreed to be debt-like is deducted, and a further adjustment is made if working capital differs from an agreed peg. The result is equity value, which is what the buyer pays for the shares.

None of that is unfair in principle. The buyer is paying for the trading business, and the cash and borrowings are settled separately because they built up during the seller’s ownership. The trouble starts with the word “free”, which many owners take to mean no adjustments at all, when the headline is the figure before any of them are made.

The £10m offer, taken from enterprise value to the amount paid (illustrative figures):

Illustrative figures.

Most sellers anticipate the cash and the bank loan, and on those alone this seller had pencilled in £9.8m. The other £1.29m came from the five lines below the bank loan, of which only the hire purchase looks like borrowing to most owners, and every one of the five was open to negotiation until a definition in the deal documents closed it.

Debt-like items: the list that keeps growing

A debt-like item is a liability the buyer treats as borrowing and deducts from the price pound for pound, although no lender is involved. Accounting standards say very little about what belongs on the list, so it is settled in negotiation, and the buyer’s first draft tends to be long. Items that commonly appear on it:

• Corporation tax owed on profits earned before completion
• Hire purchase and finance lease balances
• Director’s loan accounts owed by the company
• Accrued bonuses, commission and holiday pay not yet paid
• Deferred income, where customers have paid for work not yet delivered
• Overdue creditors, where suppliers have been paid late
• Dilapidations on leased premises
• Dividends declared but not yet paid
• Grants that may have to be repaid
• Deferred consideration still owed on an acquisition the company made itself

Several of these are reasonable. Corporation tax on profits earned before completion is the seller’s liability, and few advisers on either side would argue otherwise. Most of the disputes involve deferred income and overdue creditors.

Deferred income arises when customers pay before the work is delivered. The buyer’s position is that it inherits the obligation to deliver, so the full amount received should come off the price. A seller can answer that deferred income is part of normal trading, that the real liability is the cost of delivering the work, and that if the balance already sits within working capital, deducting it again as debt charges for it twice. In a subscription or contract business the gap between those positions can be larger than the bank loan.

Overdue creditors tend to be a problem sellers create for themselves. Paying suppliers late in the months before a sale lifts the cash balance, which helps until due diligence produces an aged creditor listing. A competent buyer then reclassifies the overdue element as debt, and the cash added near the top of the bridge comes back out further down.

If the definition of debt-like items is left loose in Heads of Terms, the buyer’s lawyer fills it in when drafting the SPA.

The working capital peg: where the biggest arguments happen

The peg is the level of working capital, broadly stock plus trade debtors less trade creditors, that the buyer expects to find in the business on completion day. A shortfall against the peg comes off the price pound for pound, and an excess is normally paid to the seller.

Without a peg, a seller could collect every debt and stop paying suppliers in the final month, keep the resulting cash, and leave the buyer to fund a business that can no longer trade normally. Few people dispute the principle, so most of the argument is about where the number is set.

How the peg is set

The usual starting point is average monthly working capital over the previous twelve months. In practice that average can work against the seller in several ways.

Seasonal businesses are hit hardest. A company that builds stock through the autumn for a winter peak will see working capital swing widely across the year, and a twelve-month average puts the peg somewhere in the middle of that range. Complete in a low month and the business shows a shortfall against the peg, which the seller pays for, although it would have reversed within weeks under the buyer’s ownership.

Growth causes a different problem. An expanding business needs more working capital each month, so a trailing average sits below what it needs today, and some buyers press for a peg based on the latest three months instead. For a fast-growing company that request can be fair, though it is also an easier way to take money off the price than arguing for a lower multiple.

Deferred income and accruals cause trouble of their own, because whether they sit inside working capital or inside debt changes the peg, and an item moved from one to the other between Heads of Terms and the SPA can shift it by six figures.

Chasing debtors before completion

Many owners spend the last weeks before completion chasing invoices on the assumption that the cash collected is theirs to keep. Collecting a debt converts working capital into cash, so cash rises and working capital falls by the same amount. If working capital ends up below the peg, the shortfall comes off the price and the seller is back roughly where they started. Holding back supplier payments has a similar effect from the other side, with the added risk that the overdue amounts are reclassified as debt.

The figure that moves the seller’s proceeds is the peg itself, and that is normally agreed months before completion week.

Locked box or completion accounts: who carries the risk

There are two ways of turning the bridge into a final price, and the choice decides when the price is fixed and who carries the trading risk while the deal completes.

With completion accounts, the price is settled after completion. A balance sheet is drawn up as at completion day, each line of the bridge is measured against the agreed definitions, and the price is adjusted. The buyer normally prepares these accounts within an agreed period, often 60 to 90 days, and the seller then has a short window to challenge them. By that stage the buyer controls the company and employs the finance staff who kept its records.

A locked box sets the price before completion, from a balance sheet at an agreed earlier date. Economic risk and reward pass to the buyer from that date. In exchange the seller undertakes that no value will leak out of the business to them before completion, such as dividends or unusual payments to shareholders beyond those agreed, and the agreed figure is what the seller receives unless the buyer proves leakage.

A locked box usually suits the seller better because the number is known at signing. Buyers will only accept one where the historic accounts are reliable enough to fix a price on, and many owner-managed businesses end up on completion accounts without the alternative ever being discussed for that reason. Reviewed accounts and a working capital history the seller can defend are what make a locked box a realistic request.

When all of this really gets decided

Most sellers expect the detail to be settled in the Sale and Purchase Agreement, with lawyers on both sides. The bulk of it is settled earlier, because Heads of Terms normally come with a period of exclusivity. Once they are signed the seller stops talking to other buyers, the buyer runs due diligence to its own timetable, and its lawyers produce the first draft of the SPA, including every definition behind the bridge.

Heads of Terms that say “£10m on a cash-free, debt-free basis with a normal level of working capital” leave everything after the £10m open. The seller then negotiates those terms with no competing bidder, against a buyer who has by now seen every weakness in the numbers, and concessions tend to be made one at a time over several weeks.

At a minimum the Heads of Terms should record:

• Whether pricing uses a locked box or completion accounts, and the locked box date if relevant
• The method for setting the working capital peg, ideally with an indicative figure
• Which items are agreed as debt-like, with everything else excluded
• Whether deferred income is treated as working capital or as debt, and that it cannot be both
• Any minimum cash the buyer requires to be left in the business
• Who prepares completion accounts, the timetable, and an independent expert to settle disputes

Heads of Terms remain non-binding on price. A buyer who later wants to change definitions written into them has to do so openly, as a retrade, which is much harder to justify than filling a gap the seller left.

The wider structure of Heads of Terms is covered in How Heads of Terms Can Elevate Your UK SME Transaction.

What to do before you accept an offer

The work that protects the price is done months before an offer arrives. Without it, a seller ends up arguing definitions on instinct against advisers who are working from data.

1. Build your own bridge. Run the latest balance sheet through the formula above, list every liability a buyer could call debt-like, and put a figure against each one. A large deduction found at this stage can be dealt with before any buyer sees it.
2. Prepare twenty-four months of monthly working capital. One year produces an average and hides any seasonal pattern. Without the longer history, the buyer’s analysis is the only one on the table when the peg is negotiated.
3. Leave supplier payments and invoicing on their normal cycle. Late payments and invoices pulled forward show up in due diligence, where they read as weak controls or an attempt to flatter the cash position.
4. Cost your deferred income. Expect the buyer to open at the full amount customers have paid, a figure that only a delivery cost backed by evidence will bring down.
5. Get the accounts into a state a buyer would lock a price on. In practice that means reviewed figures and a balance sheet without unexplained shareholder payments.
6. Agree the definitions before granting exclusivity. A buyer who won’t commit to a peg method or a debt-like list at Heads of Terms stage is likely to resist every other definition later in the process too.

The CMS European M&A Study 2026 analysed 601 private transactions that CMS advised on across Europe in 2025. Financial buyers, mostly private equity, made up 27% of buyers, six percentage points more than the year before. Purchase price adjustments were used about as often as in 2024 while earn-outs became more common, and CMS describes the direction of deal terms as a continuing buyer-friendly trend (CMS, 2026).

A private equity house may buy several companies a year, with advisers who work on completion mechanics full time, while most founders sell one business in their working lives. For an owner with an offer already on the table, the bridge described above is worth building before replying to it.