Debt-like items, explained simply
A business may have no bank loan and still owe pre-closing taxes, earned bonuses, a legal settlement or catch-up maintenance. These behave like debt, so the buyer treats them as debt.
An item belongs in either working capital or net debt, never both. If bonuses are treated as debt-like, they must be removed from both the peg and the closing working capital.
From net debt to total deductions
IllustrativeAlder Creek Manufacturing, $ millions
Debt-like items add $2.1 million to the $5.9 million of net debt.
Common debt-like items
| Item | Why it is debt-like |
|---|---|
| Unpaid pre-closing income taxes | Seller’s tax, paid by the buyer |
| Bonuses earned before closing | Seller’s cost, paid after closing |
| Deferred capex | Catch-up spending caused by past underinvestment |
| Unpaid legal settlements | Past event, future cash |
| Severance owed to departing staff | Arises from the seller’s decisions |
| Unfunded pension obligations | Past service, future payments |
| Unpaid transaction costs | The seller’s sale expenses |
| Overdue supplier balances | Payments stretched beyond normal terms |
Worked example
| Alder Creek, $ millions | Amount |
|---|---|
| Bonuses earned before closing | 0.2 |
| Catch-up capex (from the capex review) | 1.5 |
| Unpaid pre-closing income taxes | 0.3 |
| Remaining legal settlement instalment | 0.1 |
| Total debt-like items | 2.1 |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Debt-like items are often missed in the LOI, found in diligence and negotiated heavily, since they reduce the seller’s proceeds dollar for dollar.
Red flags
- Large liabilities settled after closing but caused before it
- Tax returns not filed or under review
- Recurring “one-off” obligations
Frequently asked questions
Are debt-like items agreed in the LOI?
Usually only in general terms. The specific list is negotiated after diligence.
Who decides what is debt-like?
The buyer and seller, in the purchase agreement, based on diligence findings.