Net debt
Net debt is a business’s debt, including debt-like obligations, less its cash. BDC says enterprise value equals equity value plus net debt, so net debt is the amount that separates an agreed enterprise value from what the owners’ shares are worth.
When a buyer and seller agree on what the whole operating business is worth, that figure still has to be turned into a price for the owners. BDC says enterprise value equals equity value plus net debt. The CBV Institute’s valuation glossary says equity value is generally calculated as the market value of invested capital less the market value of any debt and debt equivalents.
What the term can include
- Loans and drawn credit lines owed to banks or other lenders
- Debt equivalents, which the CBV Institute defines as debt-like financial obligations or other non-equity claims
- Cash, which BDC says most professionals treat as part of net debt, so it reduces the debt
What to check
Ask how the purchase agreement defines net debt, which obligations count, such as shareholder loans or a vendor note, and on what date it is measured. See enterprise value and the business valuation methods compared guide.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentWhat is enterprise value?
- 02CBV InstituteIndustryPractice Bulletin No. 2: International Valuation Glossary – Business Valuation
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