Understanding the ‘Cash free Debt free’ basis in HealthTech M&A deals for Founders

The Cash-Free Debt-Free (CFDF) basis is the standard transaction structure in healthtech M&A. For founders, understanding CFDF is crucial because it directly impacts the final cash you and your investors receive.

In a CFDF deal, the buyer is acquiring the core operations of the business, valuing it independently of its current financing (cash and debt). The negotiated purchase price is typically the Enterprise Value (EV).

Key Concepts for Founders:

1. Enterprise Value (EV) vs. Equity Value

Enterprise Value (EV): This is the "headline price"—the total value of the company's core operations, often calculated as a multiple of revenue or EBITDA. This is the figure the buyer is paying for the business itself.

Equity Value (or Net Proceeds to Shareholders): This is the actual cash founders and investors receive at closing. It is calculated by "bridging" from the Enterprise Value:

Equity Value=Enterprise Value+Cash on Hand−Total Debt
Effect of Debt: All financial debt is removed and deducted from the Enterprise Value. The founder/seller is responsible for paying off this debt.

Effect of Cash: All excess cash on the balance sheet is added to the Enterprise Value and goes to the founder/seller.

2. Debt and Cash Definitions

The "free" in CFDF often doesn't mean zero, but rather that the purchase price is adjusted for certain items:

Debt-Free: The buyer typically assumes only the operating liabilities (like normal trade payables) but requires the seller (you and your investors) to pay off all financial debt and debt-like items. This reduces your final proceeds.

Common "Debt-Like" Items: Bank loans, capital leases, deferred revenue that is reclassified as a liability, accrued bonuses, and any unfunded pension liabilities.

Cash-Free: The seller is entitled to the company's excess cash at closing. This cash is essentially added to the purchase price, increasing your final proceeds.

Minimum Operating Cash: Buyers will typically require the company to retain a negotiated minimum amount of "operating cash" to ensure the business can run smoothly immediately post-closing. This required minimum does not go to the seller.

3. Working Capital Adjustment

Most CFDF deals also include a working capital adjustment.

The buyer expects the business to transfer with a Target Working Capital level—the normal amount of current assets minus current liabilities needed for day-to-day operations.

If the actual working capital at closing is below the target, the purchase price (and thus your proceeds) is typically reduced.

If the actual working capital is above the target, the purchase price is typically increased.

For healthtech founders, a clean balance sheet with low financial debt and a strong cash position (above the operating minimum) leads to a higher Equity Value received at closing.

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