Answers / Financial Due Diligence
How do you treat restricted or trapped cash in the net debt calculation of a cash-free debt-free deal?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
In a cash-free debt-free deal the seller normally keeps the cash and the buyer assumes a debt-free balance sheet, with net debt true-d up at completion. But not all cash is freely available: cash that's restricted (collateral/escrow, regulatory minimums, security deposits) or trapped in jurisdictions with capital controls can't be swept out and used to reduce net debt as if it were surplus. So I'd exclude restricted/trapped cash from 'free cash' in the net-debt bridge — treating it as an operating or non-current item rather than a debt offset — because counting it lets the seller claim a cash benefit the buyer can't actually access. I'd quantify it by jurisdiction and restriction type and flag the repatriation cost. The principle mirrors treasury: only genuinely available cash nets against debt.
WHAT INTERVIEWERS LISTEN FOR
- ✓CFDF: cash nets against debt only if freely available
- ✓Restricted/trapped cash isn't a true debt offset
- ✓Exclude it from free cash in the net-debt bridge
- ✓Quantify by jurisdiction; flag repatriation cost
COMMON MISTAKES
- ✗Netting trapped/restricted cash against debt
- ✗Ignoring capital controls/collateral
- ✗Giving the seller a cash benefit the buyer can't access
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