Last week I had the opportunity to moderate a great conversation with Brian Weisberg from Mux and Danny Prohaska from EPM Solutions on how the finance technology stack is evolving.
We covered everything from our old friend Excel to today's AI-native platforms, what has actually changed, what's still missing, and where finance teams are headed next.
It was a thoughtful discussion with strong perspectives from both the customer and implementation side.
If you missed it live, you can watch the recording here (scroll to the bottom and you'll see the link!)
Hi, it's CJ Gustafson and welcome to Looking for Leverage. Each week we break down one nuanced term or theme relevant to private equity backed finance leaders, and explain it simply, with real examples.
A few weeks ago we did debt-like items, the buyer's half of the closing balance sheet, where every gray-area liability they can argue is "debt" comes off your price (not the good type of discount).
Today's term is the other half of the same phrase: cash-free, debt-free, and specifically the cash side. We’re going to discuss the cash you assume lands in your proceeds at close, and how much of it the buyer argues you have to leave behind.
Setting the scene
Let’s use the same sale process as the deferred revenue knife fight. If you remember from the previous post, at the same time my team and I were arguing about which liabilities were debt-like, a second argument was running in parallel that I'd paid almost no attention to going in. We had about $5M of cash on the balance sheet at close, and I'd been mentally spending all of it, because cash-free, debt-free means the cash adds to what the seller gets.
However… then the buyer's net debt schedule came back with a line called "minimum operating cash," and the number next to it was $1.5M. Their position was the business couldn’t run on an empty account Monday morning, so $1.5M of "my" cash had to stay in the company and never made it into the price.
The dumb version
You know how cash-free, debt-free works. The buyer takes the business with no cash and no debt. At close, the debt gets paid off and the cash on the balance sheet gets added to the price, so the equity value is enterprise value minus debt plus cash. The cash in the bank on the closing date lands in the equity proceeds that get distributed down the waterfall to the holders.
That's the clean version everybody quotes. The part that gets murky is the word "cash." Not every dollar sitting in your cash account gets added to that price.
Making it real
The fight is never about the obvious cash, the unencumbered money in your main operating account. That's yours, and nobody argues. The fight is about the dollars that are technically in a cash line on the balance sheet but, the buyer argues, aren't really free.
These are the categories that come up on almost every deal:
Minimum operating cash: The big one. The buyer argues the business needs a baseline of cash to function on day one (the float that's always moving through the system, and the cushion that covers the gap between payables going out and receipts coming in). They’ll argue that you can't strip the account to zero and hand them an empty business. Every dollar of "minimum cash" they establish is a dollar that doesn't get added to the price, straight off your proceeds.
Trapped cash: This is cash sitting in a jurisdiction you can't move money out of cleanly. The classic case is a China subsidiary: the cash builds up locally, but capital controls mean you can't just wire it to the US parent, and pulling it out as a dividend takes regulatory approval plus a withholding tax that skims the balance on the way home. You see a lighter version with a profitable operation in India or Brazil, where repatriating triggers withholding. The buyer's position is if you can't get it home at face value, they won't pay you face value for it, so they discount it or want it left in the sub (you honestly may want it left there too and agree to just take the discounted hit to avoid the headaches and months of waiting).
Restricted cash: Cash that already has a claim on it, so it shows up in your balance but isn't actually available. The typical version is a letter of credit backing your office lease, where the landlord made you post the letter of credit and the bank made you pledge cash to back it, so that cash is frozen for the life of the lease. Another example is a contractor or industrial business will have cash collateralizing performance or surety bonds on open jobs. Same thing with a company that self-insures its health plan or workers' comp carries reserves it can't touch. And if you've done acquisitions yourself, you may have cash locked in an indemnity escrow from one of your own deals until it releases.
Cash that was never yours: Money you're holding but don't own. The cleanest example is sales tax you've collected from customers and haven't remitted yet: it's sitting in your account, but it's the state's money, and no buyer will pay you for it. Same with payroll taxes withheld from employees before you send them onto Uncle Sam. Some more nuanced examples may include a property manager who holds tenant security deposits; an insurance broker holds client premiums in a trust account before passing them to the carrier; a car marketplace holds funds owed to its sellers. While all of it lands in the cash line, none of it is yours to sell. It's the asset-side cousin of the deferred revenue and customer deposit fights from the debt-like issue.
OK, you’ve got the examples. Now we’re going to slow down for a sec to be clear about working capital and the peg.
The working capital peg is almost always defined to exclude cash.
It's your receivables,
inventory, and
payables set to a normal level, with cash handled on its own line.
So minimum operating cash and the peg are two different lines in the bridge, not the same dollars counted twice.
What connects them is that they answer the same question from two directions: is the business being handed over with enough to run on?
The peg makes sure you deliver a normal working capital cycle, which funds most of day-to-day operations.
Minimum cash makes sure there's a balance in the account on top of that.
So when the buyer sets a full peg and then also demands a fat minimum cash number, make them justify needing both.
This is where many operators will get the wool pulled over their eyes and allow the buyer to essentially double dip. They already go a big peg, so don’t let them also get a big minimum cash number.
The math (with numbers)
Same $80M deal from the debt-like items issue. You're carrying $5.0M of cash on the closing balance sheet, and you'd assumed the full balance would add to your proceeds:
Cash on balance sheet: $5.0M
Less minimum operating cash the buyer requires you leave: ($1.5M)
Less trapped cash in a foreign sub (discounted, left in place): ($0.5M)
Less restricted cash backing a letter of credit: ($0.3M)
Cash that gets added to the price: $2.7M
So $2.3M of "your" cash never reaches the plus-cash line, which means it never reaches the proceeds the holders split. Stack that on the $1.4M of debt-like items that stuck in the other issue, and the two closing schedules together moved your proceeds by $3.7M on an $80M deal, most of it decided in the final stretch.
Well that escalated quickly!
In a real negotiation you don't concede the whole $2.3M. You argue the minimum cash number down (the working capital you're already delivering at peg funds most of the operating cycle, so the standalone cushion can be smaller), you push for credit on the trapped cash above its discounted value, and you accept the restricted cash because there's no argument to be had. Call it $1.0M of the $2.3M you claw back.
Cash added to the price after negotiation: $3.7M
When it clicked
What I took from running both fights on the same deal is I'd spent weeks preparing the debt-like defense and almost no time on the cash, because cash felt settled. It was in the bank. It was mine. Cash-free, debt-free said so.
Psych.
The minimum operating cash line was the one that took the most time to wrap my head around, because it was the hardest to argue against on principle. The buyer was right that the business needed cash to run on Monday. The only real question was how much, and I didn't have a number ready, so their $1.5M became the anchor and I spent the negotiation working it down instead of putting my own supported number on the table first.
The side that shows up with the defensible number sets the starting point.
What to do Monday
Figure out your real minimum operating cash before anyone asks: How much does the business actually need in the account to run a normal week, separate from what's already funded inside working capital?
Classify every dollar of cash on the balance sheet now: Free, trapped, or restricted. Know which subsidiaries hold cash you can't move, what's backing letters of credit or bonds, and what you're holding that was never yours. The buyer's QofE provider will build this schedule eventually. Build yours first.
Pressure-test minimum cash against the peg: The working capital you deliver at peg already funds most of the operating cycle. Make the buyer justify why the business needs a separate cash cushion on top, and how big it actually has to be.
Get the "cash" and "indebtedness" definitions into the LOI, not the SPA: The closing mechanics that move real money should be pinned down early, while you still have leverage, not in the last 72 hours when the train is already on the tracks.
Remember… Cash is not cash is not cash.
Wishing you a closing balance sheet where the cash in the account is cash that makes it into the price,
CJ
Looking for Leverage breaks down one PE term, clause, or mechanic each week, written for the CFOs and finance leaders who actually have to live with these things. If this got forwarded to you, subscribe at lookingforleverage.com. If there's a term you want broken down, reply and tell me. I read everything.
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