Net Debt is total interest-bearing debt minus cash and cash equivalents. It is the bridge item between Enterprise Value and Equity Value: subtract net debt from the enterprise value and you arrive at the equity a buyer actually pays. A disciplined buyer also folds in debt-like items, such as capital leases, unfunded pensions, and earnouts, that behave like debt even when they are not labeled that way.
Why it matters
Net debt converts an enterprise-level price into the equity check, and net debt divided by EBITDA is the standard measure of leverage. Getting it right is essential to both the entry bridge and the returns: every dollar of net debt you miss is a dollar of equity you understated, and the return math flows from the equity number.
From enterprise value to equity
A business with $80M of debt and $5M of cash carries $75M of net debt. At a $150M enterprise value, the implied equity value is $75M. Change the cash balance and you change the equity check dollar for dollar, which is why the cash sweep and the minimum operating cash assumption both feed straight into returns.
The common mistake
Forgetting to net out cash, or omitting debt-like items such as capital leases, unfunded pensions, or earnouts that a disciplined buyer treats as debt in the bridge. Both errors push the equity check the wrong way and distort the Sources & Uses. The fix is a defined-net-debt schedule agreed in the purchase agreement, so there is no ambiguity at close about what counts.