Net Debt & Debt-Like Items in Turkish M&A: What Should Reduce the Purchase Price?
Bank loans are only the beginning. This guide explains how buyers should identify net debt, debt-like liabilities, cash-like items and hidden balance-sheet exposures when converting enterprise value into equity value in a Turkish acquisition.
In a cash-free, debt-free M&A transaction, the headline enterprise value is not usually the amount ultimately paid to the seller. Buyers typically move from enterprise value to equity value by adding agreed cash and subtracting agreed debt and debt-like items, subject to the precise SPA definitions and any working-capital or other purchase-price adjustments.
The key diligence question is therefore not only “How much bank debt does the company have?” It is “Which balance-sheet and off-balance-sheet obligations economically belong to the pre-closing owner and should not be funded by the buyer after closing?”
Net debt is one of the areas where a technically small accounting classification can become a large purchase-price issue. A liability of TRY 10 million does not need to be called “bank debt” in the trial balance to reduce what a buyer is prepared to pay for the shares.
KPMG Türkiye explicitly identifies principal debt analysis — including on-balance-sheet and off-balance-sheet debt and debt-like balances — as a core financial due diligence workstream because those items can affect valuation. PwC similarly describes net debt and debt-like analysis as a direct value lever in buy-side due diligence.
This article sits alongside our broader guide to buying a company in Turkey and our deeper analysis of Quality of Earnings and normalized EBITDA. The purpose here is narrower: how should a buyer move from enterprise value to equity value?
The basic EV-to-equity bridge
This looks simple until the parties have to define “cash,” “debt” and “debt-like.” The accounting balance sheet was not prepared for an M&A purchase-price mechanism. It contains operating liabilities, financing liabilities, provisions, accruals, tax balances, related-party items and restricted assets that may require different treatment for deal purposes.
A worked Turkish EV-to-equity example
Assume a buyer agrees an enterprise value of TRY 420 million for a Turkish target after completing its Quality of Earnings analysis.
The point is not that every tax payable, employee accrual or shareholder balance must automatically be treated as debt-like. The point is that the buyer should identify each material balance, understand what created it, determine whether it belongs to normal working capital or pre-closing financing/economics, and then negotiate its treatment explicitly.
1. Start with conventional financial debt
Conventional debt is usually the least controversial category. A buyer would normally identify bank loans, revolving facilities, overdrafts, accrued financing costs and other borrowings, then reconcile those balances to lender statements and agreements.
- Short-term bank borrowings
- Long-term bank borrowings
- Overdrafts
- Accrued interest
- Finance-related fees payable
- Factoring with recourse
- Other financing arrangements
- Foreign-currency borrowings
- Amounts due under refinancing arrangements
- Financial guarantees requiring settlement
PwC notes that capital-structure and net-debt diligence can extend beyond bank borrowings to lease liabilities, pension provisions, conditional payments and other obligations meeting the deal definition of debt. The point for a buyer is to build the schedule from the underlying contracts and ledger rather than accepting one balance-sheet caption.
2. What makes an item “debt-like”?
A practical way to think about a debt-like item is to ask whether the obligation is economically closer to seller financing or a pre-closing obligation than to normal ongoing working capital.
Useful buyer-side questions include:
Was it generated before closing?
If the cost relates to the seller’s ownership period but cash will leave after closing, the buyer may seek debt-like treatment or specific protection.
Is it financing in substance?
Some liabilities are presented as trade or other payables but function economically like financing.
Is it outside normal working capital?
The same item should not ordinarily be deducted once as debt-like and again through the working-capital adjustment.
Will the buyer have to fund it?
If post-closing cash must settle a seller-period obligation, the economic allocation should be addressed before signing.
3. Debt-like items commonly requiring analysis in a Turkish target
| Potential item | Why a buyer investigates it | Possible treatment |
|---|---|---|
| Shareholder / related-party loans | May represent financing provided by the seller or affiliated parties. | Repayment at closing, waiver or debt-like deduction depending on deal terms. |
| Overdue tax liabilities | May represent unpaid pre-closing obligations rather than normal current-cycle balances. | Debt-like, specific indemnity or other protection depending on facts. |
| Overdue SGK liabilities | Can reflect employee-related obligations from the seller period and may include interest/penalties. | Fact-specific; often separately investigated from ordinary payroll working capital. |
| Transaction / change-of-control bonuses | Triggered by the sale rather than future operating performance. | Often negotiated as seller-related or debt-like where payable by the target. |
| Accrued interest | Part of the economic cost of debt even if not yet paid. | Typically included with the underlying debt. |
| Factoring / supplier finance | Can move liabilities from conventional debt captions into working-capital accounts. | Needs substance-over-form analysis to avoid understating debt. |
| Unpaid declared dividends | May represent value already allocated to the seller but still payable by the company. | Often requires seller-related treatment. |
| Deferred acquisition consideration | The target may owe amounts relating to an earlier acquisition. | Potential debt-like obligation. |
| Lease liabilities | Accounting presentation and deal treatment may differ, especially when EBITDA and valuation multiples are lease-adjusted. | Depends heavily on valuation convention and SPA definition. |
| Employee-related accruals | Some balances may relate to pre-closing service but remain payable post-closing. | Fact-specific; avoid automatic classification and double counting. |
| Litigation / regulatory liabilities | Known pre-closing exposures may require future cash settlement. | Specific indemnity, escrow, provision or debt-like treatment depending on certainty and agreement. |
Deloitte notes that due diligence can reveal benefit payouts, tax exposures and other financial obligations that may influence purchase price, escrow or holdback negotiations. The key is to convert the diligence finding into a transaction mechanism rather than merely describing the issue.
4. Turkish trial-balance accounts worth interrogating
A buyer should not search only the “financial liabilities” section. Debt-like exposures can sit elsewhere in the Turkish Uniform Chart of Accounts.
| Account / area | Buyer question |
|---|---|
| 300 / 400 — Bank Loans | Does the ledger reconcile to lender statements, accrued interest and the latest payoff amount? |
| 303 / 403 — Long-term debt instalments / related financial liabilities | Are current and non-current portions complete and consistently classified? |
| 309 / 409 — Other Financial Liabilities | What is the economic substance of each balance? |
| 321 / 421 — Notes Payable | Are these ordinary trade obligations or financing instruments? |
| 331 / 431 — Payables to Shareholders | Will the balance remain after closing, be repaid, waived or deducted from equity value? |
| 335 — Payables to Personnel | Does the balance include overdue payroll, bonuses or seller-period obligations? |
| 360 — Taxes and Funds Payable | Which amounts are ordinary current-cycle liabilities and which are overdue or exceptional? |
| 361 — Social Security Deductions Payable | Are SGK filings and payments current? Are there arrears, penalties or reconciliations outstanding? |
| 368 — Overdue / Rescheduled Public Liabilities | Does the account contain historic tax or social-security debt being financed over time? |
| 370 — Tax Provision | Is current-period tax properly accrued, and how does the SPA define current tax versus debt-like tax? |
| 381 / 481 — Expense Accruals | Do accruals contain interest, transaction costs, bonuses or other items requiring separate deal treatment? |
5. Not all cash is “cash-like”
Buyers often focus heavily on debt deductions and then add all recorded cash back to equity value. That can be equally dangerous. The relevant concept is usually available or unrestricted cash, as defined in the transaction documents.
Items that may require adjustment include:
- Restricted or blocked bank balances
- Cash pledged to lenders
- Customer monies held for third parties
- Minimum operating cash required immediately after closing
- Cash trapped by contractual or regulatory restrictions
- Uncleared payments
- Issued cheques not yet reflected in bank balances
- Balances in disputed or inaccessible accounts
- Short-term deposits subject to break costs or restrictions
- Cash balances that are offset against specific financing arrangements
This is why a closing net debt schedule should reconcile the general ledger to bank statements and then apply the SPA definition, rather than simply copying the “cash and cash equivalents” line from the balance sheet.
6. Net debt and working capital must not double count the same item
One of the most common purchase-price problems is classification overlap. If overdue supplier balances are treated as debt-like, for example, the working-capital calculation may also capture them through trade payables unless the mechanism explicitly removes the overlap.
The buyer should construct a classification map in which each material balance falls into one primary bucket:
PwC and Deloitte both frame normalized working capital and net debt as separate but connected components of purchase-price analysis. The practical discipline is simple: an item should not create two deductions unless the parties explicitly intended two different economic adjustments.
7. Lease liabilities: do not decide the treatment in isolation
Lease liabilities are a classic example of why the valuation methodology and net-debt definition must be aligned. If EBITDA has been calculated before lease expense under one reporting convention, deducting the full lease liability may be economically different from a valuation based on an EBITDA measure after lease-related costs.
There is no useful universal answer that says “all leases are debt” or “leases are never debt.” The buyer, valuation team and SPA advisers should ensure that the EBITDA definition, multiple and debt treatment are internally consistent.
8. Employee liabilities require a fact-specific bridge
Turkish targets may have balances relating to bonuses, unused leave, severance-related obligations, payroll, employee advances or other personnel items. Some form part of normal recurring operations. Others may represent accumulated pre-closing obligations that the buyer is expected to fund after completion.
A sensible review asks whether the cost has already reduced EBITDA, whether the associated liability is included in normal working capital, when cash payment is expected, and whether the obligation relates to pre-closing employee service. This helps prevent both under-adjustment and double counting.
9. Tax liabilities: current-cycle or seller-period exposure?
Tax balances are particularly sensitive because the company may have perfectly ordinary current tax, VAT, withholding or payroll liabilities at every month-end. Those balances should not automatically become purchase-price deductions merely because they sit on the liability side of the balance sheet.
The buyer should distinguish between:
- Normal current-cycle taxes
- Overdue tax liabilities
- Restructured or instalment-plan tax debt
- Accrued interest and penalties
- Known historic audit exposures
- Current tax for the pre-closing period
- Tax liabilities already reflected in working capital
- Uncertain tax exposures better protected through indemnity
The right solution may be debt-like treatment, a tax covenant, specific indemnity, escrow or a combination. The classification should follow the economics and the purchase agreement, not a mechanical rule that “all tax is debt.”
10. What sellers should do before diligence starts
Sellers can reduce price friction by preparing their own net debt schedule before the buyer arrives. This is not simply a defensive exercise. A clean schedule helps prevent normal operating liabilities from being incorrectly characterized as debt-like.
- Reconcile every bank and loan balance
- Prepare a shareholder / related-party balance schedule
- Identify overdue tax and SGK balances
- Separate ordinary trade liabilities from financing arrangements
- List accrued interest and financing fees
- Identify transaction-triggered employee payments
- Reconcile factoring and supplier-finance arrangements
- Prepare a cash and restricted-cash schedule
- Map potential debt-like items against working capital
- Document the rationale for disputed classifications
This is one reason vendor due diligence and M&A readiness work can create value before a sale process. The seller can identify likely buyer challenges, clean up balances and establish defensible definitions before they become negotiation surprises.
11. Net debt red flags we would investigate immediately
Large shareholder payables
The seller may expect repayment at closing even though the headline valuation assumes a cash-free, debt-free transaction.
Tax and SGK arrears
Overdue public liabilities may indicate both a price issue and broader liquidity or compliance concerns.
Factoring hidden in trade accounts
Financing structures can distort both net debt and the apparent working-capital profile.
Large “other liabilities” balances
Material catch-all accounts should be unpacked item by item before signing.
Cash that cannot be used
Restricted, pledged or third-party cash should not be valued like freely available cash without analysis.
Debt/NWC overlap
If the same liability appears in both schedules, the purchase-price mechanism can unintentionally double deduct value.
12. The closing schedule should be built before closing
The first time the buyer and seller debate whether an item is debt-like should not be after funds have moved. The accounting principles, definitions, illustrative schedule and hierarchy of treatment should be aligned in the SPA before completion.
EY’s transaction guidance highlights pre-signing work on debt, cash and working-capital definitions and pre-completion trial runs for closing net debt and working capital. That sequencing matters: the diligence team identifies the economic issue, while the transaction documents convert it into an enforceable price mechanism.
Frequently asked questions
Is every liability a debt-like item?
No. A functioning business normally carries operating liabilities. The analysis is whether a balance is ordinary working capital, financing, a pre-closing obligation or another specific risk under the agreed transaction mechanics.
Are shareholder loans always deducted from equity value?
Not automatically. Their treatment depends on whether they will be repaid, waived, capitalized or otherwise addressed at closing and on the SPA definition of debt.
Are tax liabilities always debt-like?
No. Normal current-cycle tax liabilities can be part of ordinary operations. Overdue, historic or pre-closing-period exposures may warrant different treatment. The SPA and tax covenant should avoid duplication.
Should lease liabilities be included in net debt?
It depends on the valuation convention, EBITDA definition and SPA. The treatment should be internally consistent rather than decided in isolation.
What is the biggest mistake in a net debt schedule?
One of the most common errors is double counting: deducting a liability as debt-like while it also reduces the working-capital adjustment. Classification should be mapped across both mechanisms.
What sits between headline enterprise value and the price actually paid?
SystemsCPA can review a Turkish target’s trial balance, lender schedules, shareholder balances, tax and SGK liabilities, factoring arrangements, employee accruals and cash position to build a buyer-side net debt and debt-like schedule — and connect those findings to working capital and the EV-to-equity bridge.
Discuss a Transaction →Sources & further reading
- KPMG Türkiye, Financial Due Diligence and Modelling Services — principal debt analysis, on- and off-balance-sheet debt-like items and working-capital analysis.
- PwC, Buy-side Financial Due Diligence — Quality of Earnings, Net Debt & Debt-like analysis and normalized working-capital peg.
- Deloitte, M&A Due Diligence and Governance — net debt definitions, working capital, financial obligations and purchase-price protections.
- EY, Transaction Forensics / SPA Advice — treatment of debt, cash and working capital, and completion-account support.
Turn Turkey compliance into certainty
SYSTEMS CPA supports foreign-owned companies with company formation, accounting, tax compliance and payroll in Turkey — one accountable local partner. Reviewed by Evren Özmen, SMMM (Certified Public Accountant), TÜRMOB Reg. No. 35675.
