What is the difference between enterprise value and equity value?
The offer letter states enterprise value, the value of the operating business independent of how it is financed. The wire states equity value, which is enterprise value minus debt, plus cash, and plus or minus the adjustment schedule negotiated in the purchase agreement. Every dollar the buyer classifies as debt-like moves a dollar off the seller’s wire without touching the headline number.
What counts as debt beyond bank loans?
The bank term loan is the smallest part of the fight. Buyer drafts arrive with a debt-like items list that reaches deep into the balance sheet, and each line gets argued separately.
| Debt-like item | Buyer argument | Seller counter |
|---|---|---|
| Deferred revenue | Prepaid obligations the buyer must fund to deliver | Fulfillment costs a fraction of face value, and the balance recycles inside working capital |
| Accrued bonuses | Compensation earned before close is the seller’s expense | Fair when clearly pre-close; pro-rate the year and exclude amounts tied to post-close retention |
| Unpaid payroll taxes | A statutory liability that transfers with the entity | Pay current balances at close and keep only genuinely overdue amounts in the bridge |
| Customer deposits | Cash owed back to customers if work stops | Deposits recycle in the ordinary course and already sit inside the working capital history |
| Deferred capex | Underinvestment the buyer must fund to catch up | Future capex is an operating plan, not a liability; it belongs in the buyer’s model, not the bridge |
| Earnout obligations from past acquisitions | A fixed future payment the buyer inherits | Legitimate when contractual; verify the amount and settle or assign it at close rather than accept a padded estimate |
| Aged payables | Payables stretched past terms are financing, not operations | Cure genuinely overdue balances before close and keep ordinary-course payables in working capital |
A corporate development team at a serial acquirer such as Volaris or ESW Capital runs this bridge on every transaction it closes. The founder sees the bridge once, and that asymmetry is what makes preparation worth real money.
Why is deferred revenue the biggest swing item in software deals?
Deferred revenue is cash customers paid for service not yet delivered, and in an annual-prepay software company it can exceed every other adjustment combined. The buyer’s position is that deferred revenue is a debt-like obligation priced at or near face value, because the buyer must fund the delivery. The seller’s position is that fulfilling deferred revenue costs a fraction of face value, that the balance recycles continuously, and that it belongs inside working capital.
The same fight appears inside the peg negotiation, covered in the working capital peg, and the seller must confirm the item is never counted twice, once as debt and once in the peg. The treatment belongs in the letter of intent, not in a definitive agreement drafted during exclusivity.
What does cash-free debt-free actually mean?
Cash-free debt-free means the seller keeps the cash and pays off the funded debt, with the price stated as if the company carried neither. The word free describes the pricing convention rather than the closing mechanics: cash is swept or credited, debt is discharged at close, and the definitional fights concentrate on the categories in between.
The definition of cash matters as much as the definition of debt. Restricted cash, customer float, uncleared checks, and foreign balances that are expensive to repatriate all get argued out of the cash credit, and every exclusion moves the wire down. Prepared sellers propose the cash definition themselves rather than react to the buyer’s draft.
How does a $20M offer become a $17.8M wire?
Take a hypothetical software company holding a $20M enterprise value offer, where the buyer’s adjustment schedule survives negotiation intact. The itemized bridge shows how ordinary balance sheet items compound.
| Bridge item (hypothetical) | Amount |
|---|---|
| Enterprise value offer | $20,000,000 |
| Term loan payoff | ($600,000) |
| Accrued but unpaid bonuses | ($250,000) |
| Payroll taxes on those bonuses | ($90,000) |
| Customer deposits | ($160,000) |
| Deferred revenue treated 50 percent as debt | ($700,000) |
| Earnout owed from the seller’s own prior acquisition | ($250,000) |
| Payables aged past 90 days | ($150,000) |
| Equity value wired | $17,800,000 |
Every line in that schedule was arguable, and an advised seller wins several of them. The $2.2M gap is not a market price; it is the cost of letting the buyer’s draft be the only schedule in the room.
How do I stop the buyer’s schedule from anchoring?
Build the net debt schedule yourself during preparation, before any buyer sees numbers. Classify every liability on the balance sheet as debt, debt-like, working capital, or neither, attach a written argument to each contested line, and put the deferred revenue treatment in writing at the LOI stage.
The seller’s schedule then anchors the negotiation, and the buyer must argue items onto the debt list one at a time instead of the seller arguing them off. The Proprietary Discount is usually described as a price gap, and The Windsor Drake Proprietary Discount Index measures it at that level, but a meaningful share of it is collected through schedules like this one after the headline is agreed. Sellers comparing their situation against others can start with Windsor Drake’s offer-received hub.
If you are holding an offer stated as an enterprise value, Approach Response is the Windsor Drake engagement that converts the headline into a defended wire amount before exclusivity begins.
Questions founders ask
Is the offer price the amount I receive at closing?
No. The offer states enterprise value, and the wire states equity value after subtracting funded debt and the negotiated schedule of debt-like items, then settling cash and the working capital adjustment. On lower-middle-market software deals the gap between the two figures routinely reaches seven figures.
Is deferred revenue always treated as debt?
No. Outcomes range from full working capital treatment to full face-value debt treatment, with negotiated percentage haircuts common in between. In annual-prepay software companies deferred revenue is typically the single largest swing item in the bridge, so its treatment deserves LOI-stage attention.
What does cash-free debt-free mean in an offer?
The price assumes the company transfers with no cash and no funded debt, so the seller keeps cash and discharges debt at close. The negotiation then concentrates on definitions: which balances count as cash the seller keeps, and which liabilities count as debt the price absorbs.
Can the net debt definition be negotiated in the LOI?
Yes, and prepared sellers insist on it. The LOI can define debt, list agreed debt-like items, and fix the deferred revenue treatment before exclusivity removes competitive pressure. An LOI that is silent on definitions leaves the buyer free to propose an expansive schedule when no rival bid exists.
Does the working capital adjustment come on top of net debt?
Yes. The two mechanisms are separate: net debt items reduce the price directly, while the working capital true-up compares delivered working capital against the peg. Sellers must check the two schedules against each other, because a liability counted in both places is a double deduction.
Last reviewed July 28, 2026 by Jeff Barrington, Founder and Managing Director, Windsor Drake. Content on this page may be cited with attribution and a link to https://windsordrake.com/valuation/net-debt-adjustments/