Cash-free, debt-free: who keeps the cash from a license paid before closing?

Cash-free, debt-free in plain terms

In a cash-free, debt-free deal, the buyer prices the business as if it had no cash and no debt. At closing, the seller keeps the cash or is credited for it, pays off debt out of the proceeds, and hands over a normal level of working capital. A one-time data license payment that has reached the company's bank account before closing will usually count as cash on the seller's side, but only the purchase agreement's definitions settle it.

The headline number in a letter of intent is enterprise value. What the seller actually receives is equity value, which comes out of a price bridge like this:

1. Start with the headline enterprise value from the LOI.
2. Add cash at closing, as the purchase agreement defines cash.
3. Subtract debt and debt-like items, as the agreement defines them; unpaid pre-closing taxes and deferred obligations are often negotiated into this line.
4. Adjust up or down for the gap between actual net working capital and the agreed target, often called the peg.
5. Subtract transaction expenses the seller bears, then escrows and holdbacks.
6. The remainder is paid to the seller at closing, subject to post-closing true-ups.

Where a pre-closing license payment lands

How a license shows up depends on where the money is when the deal closes. SourceX licenses pay once, typically within about 60 days of invoicing once the buyer selects the data, so it is worth lining up the invoice date against the expected closing date.

Why timing matters for value

A one-time license payment tends to add cash rather than multiple. Quality of earnings reviews commonly adjust non-recurring revenue out of the EBITDA that buyers capitalize, so the license is more likely to reach the seller as cash kept at closing than as a higher headline price.

Accounting timing matters too. Under ASC 606, a license of intellectual property is assessed as either a right to use the IP as it exists when granted, satisfied at a point in time, or a right to access it throughout the license period, satisfied over time (Deloitte revenue recognition roadmap, section 12.4). Ask the company's auditors how its license would be recognized, because the answer shapes what sits on the closing balance sheet.

This is general information, not legal, tax or financial advice. Confirm with your own counsel and tax adviser before acting.

Illustrative: one license, three timelines

Illustrative and fictional: a regional engineering services company with years of project records licenses part of its archive while its owners prepare a sale.

Questions to settle before anything is signed

• Does the purchase agreement's definition of cash include all license proceeds received before closing?
• Is a license receivable inside or outside the working capital target?
• Are remaining delivery obligations treated as debt-like, and who performs them after closing?
• How are taxes on the license income split between pre- and post-closing periods?
• Has the license been disclosed in the schedules and the data room?
• Does any lender consent or prepayment requirement apply to the proceeds?

The M&A closing checklist lists the consents and notices to collect. Owners worried about bandwidth can sequence the work using the page on avoiding management distraction during a sale, and tax character is covered in whether licensing income is ordinary income or capital gain. Employee-owned companies can see how a license fits the ESOP sale process.

What it means if an advisor introduced you

If an M&A advisor or another referral partner introduced the company to SourceX, the partner's reward is a share of SourceX's fee and is never deducted from what the company receives. The company is quoted one all-in price with SourceX's fee already inside it, so there is no separate referral charge to carry into the bridge as a transaction expense.

Limits of this explanation

Every purchase agreement is negotiated, and definitions of cash, debt and working capital vary from deal to deal. Treat this page as a list of questions for counsel, not a set of answers.

Next step

Before a sale process starts, check whether the company fits: 50+ full-time employees at peak (contractors excluded), several years of records in many systems, and rights to license them. The company fit checker gives a preliminary, non-binding read, and owners can apply at sourcex.si/apply. Advisors can register as a partner to make the introduction.