Example: Financial debt definition for cash-free/debt-free

Example of a definition of debt

Example of a definition of debt (“debt” or “financial debt”) in the context of a cash-free/debt-free arrangement in the case of a company purchase/sale: In the context of the cash-free/debt-free provisions in the SPA (Sales and Purchase Agreement), the items “debt” or “financial debt” and “cash” must be defined. Below you will find an example of a definition for “Financial Debt”. Within the negotiation of the SPA, the positions “Cash”, “Debt” and “Working Capital” are to be defined and thus negotiated. The following example shows ONE possible variant of such a definition related to a specific company acquisition/sale and is therefore not generally valid!

„Financial Debt“ shall mean the sum of

• all debt owed to banks (Kreditinstitute) and other lenders (including, without limitation, loans, overdrafts, bonds and promissory notes, and interest accrued as of the effective date), other than those resulting from the supply of goods and services, provided, that the payment terms are in line with the payment terms customary in the industry,
• all payment obligations to Sellers or Sellers‘ Affiliates, other than those resulting from the supply of goods and services, provided, that the payment terms are in line with the payment terms customary in the industry,
• all obligations for deferred purchase price payments or purchase price installments relating to the acquisition of fixed assets (Anlagevermögen),
• all obligations for purchase price payments relating to the acquisition of any other assets, in each case, provided, that the payment terms have been extended beyond the payment terms customary in the industry,
• the amount of accruals for taxes on income and revenue such as corporate income tax, trade tax and similar taxes reflected on the effective date financial statements,
• any other liabilities comparable with liabilities to banks or other forms of financing whether or not interest bearing,
• accruals for latent tax liabilities pursuant to Section 274 HGB and Section 306 HGB,
• suretyships (Bürgschaften) and letters of comfort (Patronatserklärungen) that are required to be recorded as a footnote or otherwise in the Company’s financial statements in accordance with GAAP,
• accruals for guarantee commitments, including warranty claims and product liability claims against the Company, to the extent exceeding an average over the last four years,
• accruals for litigation, claims and similar legal proceedings, if and to the extent a corresponding credit item (Aktivposten) has not been recorded,
• any payments by the Company to managing directors (Geschäftsführer) or employees in connection with the Agreement and the consummation of the transactions contemplated by the Agreement, including, but not limited to, the bonus payment to managing directors pursuant to the amendment to the service agreement between managing directors and the Company, and
• any accruals for any of the above liabilities.

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Subject of this article: Example of a definition of the item “Financial Debt” in the context of the cash-free/debt-free provision in a company purchase/sale agreement (English: “SPA”). The definition of the BMA can be found here.