What Is Net Debt?

Net debt measures a company’s debt burden net of cash on hand — the figure used to bridge from enterprise value to equity value in most M&A and credit analysis.

How it works

Standard calculation: short-term debt + long-term debt + capital leases (sometimes) − cash − cash equivalents − marketable securities. Example: $8M term loan, $2M drawn revolver, $1M cash → net debt $9M.

In a cash-free, debt-free sale, the seller keeps cash and pays off debt at close; purchase price adjusts if actual net debt differs from the target agreed in the LOI. Venture-backed startups often carry venture debt or equipment financing while keeping modest cash — net debt may be small but still affects waterfall at exit.

Enterprise value (EV) minus net debt approximates equity value. Multiples like EV/EBITDA use net debt in the numerator construction when moving from equity to enterprise metrics.

Why it matters

• Founders: Before a sale or major debt round, clean up stray facilities and document restricted cash. Surprises at close reduce seller proceeds dollar-for-dollar in many structures.
• Investors: Leverage amplifies returns in buyouts and adds risk in downturns. Net debt trajectory — whether cash generation pays down borrowings — is central to credit and LBO underwriting.

Common mistake

Subtracting all cash without checking restrictions. Customer deposits, escrow, or covenant-trapped accounts may not be available to repay debt in a stress scenario.

Related ideas

See also leverage multiple, cash-free debt-free, enterprise value, and venture debt.