Debt-Like Items: The Hidden Deductions That Reduce Your Completion Payment

The 30-Second Definition

Debt-like items are balance sheet liabilities — or commitments that function like liabilities — that a buyer deducts from the agreed enterprise value when calculating the equity consideration paid to the seller on completion day. In a Debt-Free, Cash-Free transaction, the seller is required to settle all debt and debt-like items before or at completion, or accept a pound-for-pound reduction in their proceeds. The gap between the enterprise value agreed in the Letter of Intent and the cash that arrives in the seller's bank account on completion day is almost always larger than the seller anticipated — and debt-like items are the primary reason why.

Why Debt-Like Items Exist as a Category

The Debt-Free, Cash-Free framework established in the SPA defines "Debt" for the purposes of the transaction. This definition is not limited to bank loans and overdrafts. Buyers' solicitors draft the Debt definition as broadly as possible to capture every liability that reduces the net value of the business being transferred. The negotiation of what falls inside and outside this definition is one of the most consequential — and most underappreciated — legal negotiations in the entire transaction.

A seller who focuses exclusively on the headline enterprise value multiple and pays insufficient attention to the Debt definition may discover on completion day that items they considered ordinary operational liabilities have been classified as debt-like and deducted from their proceeds. At enterprise values of £5M to £20M, the aggregate impact of debt-like items routinely falls between £200,000 and £1.5M — material enough to alter the seller's financial planning materially.

The Most Common Debt-Like Items in UK Mid-Market Transactions

Unpaid Holiday Accruals: Under UK employment law, employees accrue statutory and contractual holiday entitlement throughout the year. Any accrued but untaken holiday represents a liability of the business — the obligation to either allow the employee to take that time or pay it out on termination. In a business with 30 employees and an average accrued holiday balance of ten days per person, this liability can amount to £50,000 to £150,000 depending on average salary levels. Buyers treat this as a debt-like item on the basis that it is a pre-existing obligation that the new owner will be required to honour.

Deferred Tax Liabilities: Where a business has taken accelerated tax deductions — capital allowances on plant and equipment, for example — that have reduced its tax payments in prior years relative to the accounting depreciation charge, a deferred tax liability arises representing the tax that will eventually become payable. Buyers deduct this liability from enterprise value on the basis that it represents a future cash outflow attributable to the seller's period of ownership.

Defined Benefit Pension Deficits: Where a business operates a defined benefit (final salary) pension scheme, the deficit between the scheme's assets and its actuarially calculated liabilities is a direct debt-like item. Pension deficits in UK mid-market businesses are frequently material — running to hundreds of thousands or millions of pounds — and are one of the most complex items to value and negotiate in a transaction. Sellers with legacy defined benefit schemes should obtain an actuarial valuation well in advance of going to market.

Director and Shareholder Loan Accounts: Any loans made by the company to its directors or shareholders — or conversely, any loans made by directors or shareholders to the company that are due to be repaid — appear on the balance sheet and are treated as debt-like items. Director loan accounts in owner-managed businesses are frequently untidy: drawn informally, not documented properly, and inconsistently treated in the accounts. Buyers will insist on full settlement or formal documentation of all intercompany and director loan positions before completion.

Customer Deposits and Deferred Revenue: Where customers have paid in advance for goods or services not yet delivered, the balance sheet carries a deferred revenue or customer deposit liability. This represents an obligation to perform — to deliver the product or service the customer has already paid for — and buyers treat it as a debt-like item because it is a commitment that must be honoured from future revenue rather than additional income. For subscription businesses, SaaS companies, and professional services firms with retainer arrangements, deferred revenue balances can be substantial.

Finance Lease and Hire Purchase Obligations: Capital lease liabilities — the outstanding obligations under finance leases for equipment, vehicles, or technology — are treated as debt under IFRS 16 and most buyer debt definitions. In a business with a significant fleet of leased vehicles or a substantial equipment base funded through hire purchase, these obligations can represent a meaningful deduction from enterprise value.

Unpaid Corporation Tax and VAT: Any corporation tax assessed but not yet paid, outstanding VAT balances, or PAYE and National Insurance arrears are treated as debt-like on the basis that they represent pre-existing obligations to HMRC that the buyer will inherit if not settled at completion.

Contingent Liabilities: Outstanding legal claims, regulatory investigations, and contractual disputes that have not yet been formally resolved represent contingent liabilities — obligations that may or may not crystallise depending on the outcome of proceedings. Where a contingent liability is sufficiently probable and quantifiable, buyers will seek either a specific escrow retention or a direct deduction from the enterprise value to reflect the expected cost of resolution.

How to Clean the Balance Sheet Before Going to Market

The most effective strategy for minimising debt-like deductions is systematic balance sheet remediation in the twelve to twenty-four months before the anticipated transaction. The specific actions that generate the highest return in this period include settling all director loan accounts and documenting any remaining intercompany positions clearly, addressing defined benefit pension deficits through additional employer contributions or scheme restructuring, reviewing the holiday accrual position and encouraging employees to take leave to reduce the outstanding liability, reviewing deferred revenue balances and ensuring contract terms are structured to minimise upfront payment obligations where possible, and obtaining a full schedule of finance lease obligations so that their treatment in the deal structure can be anticipated and negotiated in advance.

The goal is not to eliminate every liability — normal operational liabilities are expected and are not debt-like by definition. The goal is to ensure that nothing on the balance sheet will surprise the buyer during due diligence, and that the seller enters the SPA negotiation with a clear, pre-prepared position on every item the buyer is likely to classify as debt-like.