How does debt affect the sale price?
It is deducted from enterprise value, euro for euro. But buyers define debt more broadly than owners do — leases, tax owed and shareholder loans usually count.
It comes off the price, euro for euro. The multiple produces enterprise value — what the operating business is worth debt-free — and debt is then deducted to arrive at what reaches you.
- Enterprise value
- €2,400,000
- Less total debt
- −€380,000
- Plus surplus cash
- +€120,000
Buyers define debt broadly
More than the bank loan. Finance leases. Corporation tax and VAT owed. Deferred consideration from an earlier acquisition. Shareholder loans. Pension deficits. Sometimes overdue payables beyond normal terms.
This definition is negotiated and the negotiation matters — the difference between a narrow and a broad definition is regularly six figures on a mid-sized transaction.
Does debt reduce the multiple as well?
Not usually, if it is serviceable and was used productively. Debt that funded equipment which generates the earnings is neutral. Debt taken to cover trading losses is a different signal, and it affects the multiple as well as the deduction — because it says something about the earnings rather than about the balance sheet.
Paying it down before a sale
Rarely worth doing purely for the sale. A euro of debt repaid reduces the deduction by a euro, so you have converted cash into price at exactly one to one. The exception is where debt is at a level that frightens buyers or breaches covenants — then it is not arithmetic, it is access to the buyer pool.
How to value a business covers the bridge to equity value; common valuation mistakes covers the working capital peg, which is where more value leaks.