The Full Picture
Sharing stories and strategies on building businesses, investing capital, and the personal side of wealth
By Panoramic Capital Partners
There are two numbers.
The first one gets said out loud. It’s the number at the dinner party, the one in the local business journal, the one a former employee hears about secondhand and repeats with an extra million attached. Forty million. It has a satisfying shape to it.
The second number arrives quietly, months later, in an account statement. Nobody says that one out loud. Most owners haven’t run it before the first number is already public, which means the gap between the two arrives as a discovery rather than a plan.
The gap is not a swindle. Every dollar of it is disclosed, negotiated, and agreed to in a document the seller signs. The problem is that the deductions are negotiated at different times, by different people, in different rooms, and almost nobody assembles them into one view until the deal is finished.
Key Takeaways
1. How much you actually get when you sell your business is a different question from what the business is worth, and the answer typically sits well below the headline enterprise value.
2. Seven adjustments separate the two figures: debt, the cash adjustment, the working capital true-up, escrow, rollover equity, transaction fees, and taxes.
3. Some of those are arithmetic and some are negotiable. Knowing which is which is where sellers gain or lose the most ground.
4. Rollover equity is not proceeds. A 20 percent post-close stake is 20 percent of the buyer’s equity check, not 20 percent of the headline price, and it sits below the buyer’s acquisition debt.
5. Some adjustments, taxes and fees in particular, are sized by decisions made long before the letter of intent.
The point of this article
The price a buyer agrees to pay and the money a seller ends up with are two different numbers, and the distance between them is larger than most owners expect. The deductions in between are all disclosed and all negotiated, just never in the same room or at the same time. Assembling them into one view is straightforward arithmetic that almost nobody runs until the deal is done.
That’s the entire argument. The rest of this article covers four things:
1. What separates enterprise value from net proceeds
2. The seven adjustments, in the order they apply, worked through on an illustrative deal
3. Which of them are negotiable and which are simply arithmetic
4. What an owner should model before signing anything
What is the difference between enterprise value and net proceeds?
Nearly all deals quote it on a cash-free, debt-free basis, and that phrase does more work than it appears to.
Cash-free means the cash sitting in the business belongs to the seller and gets swept out at closing, on top of the quoted price. Debt-free means outstanding borrowings get paid off at closing out of the proceeds, or stay in place and get netted against what the seller receives. Either way the debt comes out of the seller’s side.
Net proceeds are what the seller keeps once that arithmetic runs. The two numbers are separated by a sequence of adjustments, each negotiated on its own and mostly by professionals other than the seller.
Here’s the bridge in order.
What actually comes out between the headline and the wire?
The following is a hypothetical illustration for a company sold at an enterprise value of $40 million. It’s not a projection, it doesn’t describe any actual transaction, and the figures for any real deal would differ substantially.
1. Debt repaid at closing. Most deals are structured cash-free and debt-free, which means the seller’s outstanding borrowings come off the top. Term loans, the revolver balance, capital leases, and anything the buyer characterizes as debt-like. Assume $7 million. Running total: $33 million.
2. Cash retained. The flip side of the same convention. Cash on the balance sheet belongs to the seller and gets added back. Assume $1.5 million. Running total: $34.5 million.
3. The working capital true-up. The purchase agreement sets a target level of working capital the business must deliver at closing, usually based on a trailing average. Delivering less than the target reduces the price dollar for dollar. Assume the business comes in $800,000 light. Running total: $33.7 million. This one deserves its own article, which it has: The Net Working Capital Peg (link pending) covers how the target gets set and where sellers lose ground on it.
4. Escrow and holdback. A portion of the price sits in escrow to cover breaches of representations and warranties, typically for twelve to twenty-four months after closing. Assume 10 percent of the $40 million enterprise value, held for eighteen months, or $4 million. Subtotal after escrow: $29.7 million. Representations and warranties insurance can be purchased to shrink this figure substantially, often down to the policy deductible or roughly 1 percent of transaction value, which moves a meaningful amount of money from escrow into the closing wire. The money in escrow isn’t gone. It isn’t spendable either.
5. Rollover equity. Financial buyers frequently require the seller to hold a stake in the company after closing, and that stake is a percentage of the new entity rather than a percentage of the price. The arithmetic runs through the buyer’s capital structure. Assume the buyer funds the $40 million purchase with $15 million of acquisition debt and $25 million of equity. A 20 percent post-close ownership position is 20 percent of that $25 million equity, or $5 million. Running total: $24.7 million. A healthy rollover is not purely a cost to the seller. It signals that the owner wants to stay invested and believes there’s more opportunity ahead, and buyers price that confidence into what they’re willing to pay.
6. Transaction fees. Investment bank, M&A counsel, quality of earnings provider, accountants, and the assorted costs of running a process. Four percent of enterprise value is a reasonable illustrative figure at this size, or $1.6 million. Running total: $23.1 million.
7. Taxes. The largest single deduction in most transactions, and the one most sensitive to decisions made years earlier. Entity structure, deal shape, holding periods, and state residency each move this figure materially. The Planning Window That Closes at the LOI (link pending) covers why almost all of that is determined before the process begins.
In this illustration, the $40 million headline becomes roughly $23.1 million of pre-tax cash at closing, plus $4 million held in escrow and $5 million of equity in the new company. Those three figures total $32.1 million, which is the $40 million headline less $7 million of debt and $0.8 million of working capital shortfall and $1.6 million of fees, plus $1.5 million of retained cash. The seller was not cheated. Nobody misrepresented anything. Every line was in the agreement.
Which of these are negotiable and which are arithmetic?
This is the distinction almost nobody explains, and it’s where preparation pays.
Largely arithmetic. Debt repaid and cash retained follow from the balance sheet and the cash-free, debt- free convention. Negotiating happens at the margins, over which items count as debt-like. Deferred revenue, accrued paid time off, and customer deposits all get argued about, and the arguments are worth having.
Genuinely negotiable. The working capital target, the size and duration of escrow, the percentage of rollover required, and the definition of nearly every term above. A seller with clean financials and credible historical data has real leverage on the working capital target. A seller whose numbers get reconstructed during diligence has very little, which is one of the quieter arguments for doing a sell-side quality of earnings analysis before a buyer runs their own.
Determined years earlier. Taxes, mostly. Also the fee load, which depends on how prepared the business was when the process started. A company that needs nine months of cleanup pays for nine months of cleanup.
Why does rollover equity deserve separate attention?
Rollover equity is the item owners most consistently misread, and the misreading runs in one direction.
Keeping 20 percent of the new company is not the same as keeping 20 percent of the old one. In the illustration above, the business carried $7 million of debt before the sale and carries $15 million after it. The owner’s remaining stake now sits below more than twice as much debt, and debt gets repaid before equity sees anything. The entity is valued at the price the buyer just paid, and the owner no longer controls the decisions that service that debt. The rollover is a second investment, made on terms the buyer set.
That investment can perform very well, and it can also lose value. Second bites are real, and for owners who believe in the growth plan the rollover is often the most attractive part of the deal. It also works in the seller’s favor during negotiation. A buyer reads a willing rollover as evidence that the person who knows the business best wants to keep owning part of it, and that belief tends to show up in the price. The question isn’t whether to roll. It’s whether the owner understands they’re making an investment decision rather than receiving a smaller check, and whether the family’s balance sheet can carry that much concentration in a single private position for another three to five years.
How Private Equity Actually Works, Pt. 2 covers the capital structure that rollover equity sits inside.
What should an owner model before signing anything?
Five questions, answerable well before a process starts.
1. What’s the expected bridge from enterprise value to pre-tax cash at closing, using the deal shape most likely to be on the table?
2. What portion of the proceeds arrives as cash at closing, what portion is held in escrow, and what portion is reinvested as rollover equity, and what’s the timing on each?
3. What’s the after-tax figure under the current entity structure, and what would it be under a different one?
4. Does the cash portion alone meet what the family actually needs, or does the plan depend on the escrow releasing and the rollover performing?
5. What would have to be true for this deal to be the wrong one?
An owner who can answer the fourth question has done something most sellers never do, which is separate
the money they’re counting on from the money they’re hoping for.
The part that isn’t arithmetic
The bridge above is mechanical. Running it in advance is not hard, and it costs almost nothing compared to the size of the transaction.
What’s harder is that the exercise forces a question the numbers can’t answer: whether the resulting figure funds the life the family actually wants. Running that calculation before a process begins gives an owner a reference point for evaluating offers. Running it afterward means reacting to a number that’s already fixed. We wrote about the period after closing in Life After Selling Your Business.
Running that bridge with the owners we partner with is part of what we do, and it works best well ahead of a process. The exercise has three parts:
1. Building the bridge on the actual balance sheet and the deal shape most likely to be on the table, rather than on a rule of thumb.
2. Separating the cash that arrives at closing from the escrowed funds and the reinvested equity, so the family knows what’s spendable and when.
3. Testing the resulting figure against what the family is actually trying to fund, which is where planning and the sale decision meet.
Frequently Asked Questions
How much do you actually get when you sell your business? It depends on the capital structure, the deal shape, and the tax profile, and the spread across deals is wide. What’s consistent is the sequence of adjustments: debt, cash, working capital, escrow, rollover, fees, and taxes. Running that bridge on the specific business, before a process begins, produces a figure built on that business’s own numbers rather than a rule of thumb.
What are purchase price adjustments? Adjustments are the contractual mechanics that move the final price away from the agreed enterprise value. The main ones are the cash-free, debt-free adjustment and the working capital true-up against an agreed target. Both are settled against the closing balance sheet, often finalized sixty to ninety days after closing.
Is escrow money eventually received? Escrowed funds are held against potential claims for breaches of the seller’s representations and are released in whole or in part on the schedule in the agreement, depending on claims. Treating escrow as received cash at closing is a planning error. Treating it as lost is too pessimistic.
Should an owner accept rollover equity? That’s an investment decision as well as a deal term, and it depends on conviction in the growth plan and on how much concentration the family balance sheet can carry. The important step is evaluating it as a new investment at the buyer’s valuation, not as a discount on the purchase price.
When should this analysis happen? Before engaging an investment bank, ideally two or more years out. Some of the adjustments in the bridge, taxes especially, are shaped by structural decisions with long lead times, and the analysis is considerably less useful once a letter of intent has fixed the price.
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