When You Sell a Company Who Gets the Money?

When you sell a company who gets the money depends on a fixed, rarely negotiable order: senior secured lenders are paid off first out of closing proceeds, then junior and subordinated debt, then mezzanine or preferred equity, then accrued professional fees (M&A advisor, QoE, legal, accounting), then the working capital true-up, then the escrow holdback is set aside, then earnouts are deferred, and only what remains (the residual) flows to the owners on the wire. On a typical $10M lower-middle-market deal, owners receive roughly 55 to 65 percent in cash at close and the rest is staged across 12 to 36 months.

Context: Why This Question Matters

Most first-time sellers see the headline number (the enterprise value or the purchase price) and assume that money lands in their account on closing day. It does not. Every dollar of consideration runs through a waterfall of claims that sit ahead of the owner, and the gap between the headline price and the cash on the wire is routinely $1.5M to $4M on a $10M deal once debt payoffs, advisor fees, escrow, and earnout are subtracted.

Knowing the order matters because each layer is negotiable at a different point in the deal. Senior debt payoff is mechanical (the lender sends a payoff letter, the funds flow), but escrow size, earnout structure, and working capital peg are all negotiated into the purchase agreement. Owners who do not understand the waterfall give back two to four percentage points of net proceeds without realizing it, because they accepted whatever the buyer’s first draft said about holdbacks and adjustments.

The Detailed Answer

Layer 1: Senior Secured Debt. Any SBA 7(a) loan, bank line of credit, equipment financing, or real estate mortgage that has a UCC-1 filed against the company’s assets gets paid off first directly out of the cash consideration at the closing wire. The lender issues a payoff letter 5 to 10 business days before close stating the exact wire amount through the closing date. Funds flow from buyer’s escrow agent directly to the senior lender, not through the seller. On a $10M deal with $2M of senior debt, the wire to the seller is reduced by $2M before any other adjustment is calculated.

Layer 2: Junior Secured and Subordinated Debt. Second-lien notes, subordinated seller paper from a prior recapitalization, equipment loans not held by the senior lender, and any other secured creditor with a perfected lien gets paid out of the remaining cash after the senior lender is satisfied. Intercreditor agreements (signed years earlier between the senior and junior lenders) govern the order. If the deal does not generate enough cash to pay all junior debt, the junior lender either takes a haircut or rolls into the buyer’s new capital structure.

Layer 3: Mezzanine Debt or Preferred Equity. Mezz funds and preferred equity holders sit above common equity in the waterfall. On founder-owned lower-middle-market businesses this layer is usually absent, but on private-equity-backed or recapitalized companies it can be the largest single claim outside of senior debt. Preferred equity often carries an accrued PIK dividend and a liquidation preference (typically 1x to 2x of invested capital), both of which must be paid before common shareholders see a dollar.

Layer 4: Accrued Transaction Fees. The professionals who got the deal done are paid at close out of seller proceeds. M&A advisor success fees follow a Lehman or modified Lehman structure, landing at 3 to 10 percent of total consideration depending on deal size and complexity (Capstone Partners M&A advisor fee survey, 2025). Quality of earnings providers charge $30K to $75K for sub-$25M deals (Wakefield Hare and similar QoE benchmarks). Sell-side legal counsel runs $75K to $300K depending on transaction complexity and number of redlines. Tax and accounting advisors add another $25K to $100K. On a clean $10M deal, total seller-side fees typically aggregate $600K to $900K.

Layer 5: Working Capital True-Up. Almost every purchase agreement includes a working capital peg, a negotiated target level of net working capital (current assets minus current liabilities, excluding cash and debt) that the buyer expects to inherit. If actual closing-date working capital is above the peg, the buyer pays the seller the excess. If below, the seller pays the buyer the shortfall, usually out of the closing wire. The peg is set during diligence using a trailing-twelve-month average. SRS Acquiom 2025 deal terms study reports that working capital disputes generate post-close adjustments in roughly 60 percent of transactions, with median adjustment magnitudes of 1 to 3 percent of purchase price.

Layer 6: Escrow Holdback. A portion of the purchase price (typically 5 to 15 percent on private deals per the Stout 2025 R&W insurance survey) is held by a third-party escrow agent for 12 to 24 months to backstop the seller’s representations and warranties. If the buyer discovers a breach (an undisclosed lawsuit, a misstated EBITDA item, an unpaid sales tax liability), the buyer files a claim and the escrow agent releases funds to the buyer. Whatever survives the claim period is released to the seller. Deals with a stand-alone R&W insurance policy often reduce the escrow to 0.5 to 1 percent of consideration because the insurer carries most of the indemnity risk.

Layer 7: Earnouts and Deferred Consideration. Earnouts are contingent payments tied to post-close performance milestones (revenue, EBITDA, customer retention, regulatory approvals, or product launches) typically paid over 12 to 36 months. They are not cash at close. SRS Acquiom 2025 data shows earnouts in 21 percent of private-target deals with median size 16 percent of purchase price and median achievement rate of 60 to 70 percent of the maximum possible payout. Seller notes (where the seller finances part of the purchase price through a promissory note) sit in the same logical bucket: deferred, contingent on buyer performance.

Layer 8: Owner Residual. What remains after every layer above flows to the shareholders or members of the selling entity, distributed according to the company’s cap table or operating agreement. For a single-owner LLC, it is one wire. For a two-founder S-corp owned 80/20, two wires in proportion. For a venture-backed C-corp with preferred shares, common stock options, and a waterfall, the cap table software (Carta, Pulley) runs the calculation and the paying agent (often Acquiom or Computershare) cuts the wires.

Worked Example: A $10M Sale of a Two-Founder S-Corp

Assume a $10M cash-plus-earnout sale of an S-corporation owned 80 percent by Founder A and 20 percent by Founder B. The company carries $2M in SBA 7(a) debt secured by all business assets. The deal includes a $750K escrow held for 18 months and a $1M earnout payable over two years tied to EBITDA targets. Actual closing-date working capital came in $200K above the negotiated peg.

The deferred pieces matter too. The $750K escrow has a historical release probability around 87 percent on clean S-corp deals (SRS Acquiom claim-frequency benchmarks), so the probability-weighted expected release is roughly $652K paid in month 18 to 24. The $1M earnout has an expected value around $600K based on the 60 percent median achievement rate, paid in tranches at months 12 and 24. Across 24 months, the owners realize roughly $7.0M of the original $10M headline price before any taxes are paid.

Taxes come next. For an S-corp asset sale, the pass-through gain flows to the shareholders’ personal returns at long-term capital gains rates (20 percent federal plus 3.8 percent NIIT plus state, often 25 to 33 percent combined). On Founder A’s $4.62M cash-at-close share, the federal-plus-state hit typically runs $1.1M to $1.5M, leaving $3.1M to $3.5M of after-tax cash. Our companion piece on tax deferral covers the strategies (installment sales, QOF, ESOP rollover, CRT) that can compress this. See how to defer tax on the sale of a business over 20 years for the stacked-structure approach.

What Most Owners Get Wrong

Misconception 1: “The purchase price is the check I receive.” No. The purchase price is the gross consideration before debt payoff, fees, working capital adjustment, escrow, and earnout. The “cash at close” line on the closing statement is what hits the seller’s account on day one, and it routinely runs 55 to 70 percent of the headline number on a typical lower-middle-market deal.

Misconception 2: “Escrow is just a formality, I always get it back.” Escrow release rates are high (the Stout 2025 R&W survey shows median claim recoveries under 10 percent of escrow on indemnified deals), but they are not 100 percent. Buyers routinely file good-faith claims for working capital disputes, unrecorded liabilities, and tax adjustments. Budget for 85 to 90 percent of escrow returning, not 100 percent.

Misconception 3: “Earnouts are basically guaranteed if I just keep running the business.” Median earnout achievement runs 60 to 70 percent of maximum, not 100 percent (SRS Acquiom 2025). Once the buyer takes operational control, the metrics that drive the earnout are often outside the seller’s influence: the buyer rolls in their own systems, changes pricing, integrates teams, and the EBITDA target the earnout was written against no longer reflects how the combined entity reports the numbers. Negotiate earnout protections (acceleration on change of control, defined accounting policies, audit rights) into the purchase agreement or treat the earnout as a 60 percent expected-value figure.

Misconception 4: “My CPA will handle the waterfall at close.” Closing waterfalls are run by the buyer’s transaction counsel using the closing flow of funds memo. The seller’s CPA reviews the seller’s side, but the actual wire instructions come from the purchase agreement and the closing certificates. If the seller does not have an M&A-experienced attorney reviewing the funds-flow memo two days before close, errors get baked in (wrong escrow agent, wrong wire instructions, misallocated working capital). Fix it before signing the closing certificates, not after.

How CT Acquisitions Approaches This

CT Acquisitions is a buyer-paid M&A advisor, which means sellers pay zero advisory fees. The buyer pays our success fee at close, so our incentive is aligned with maximizing the cash-at-close line on your closing statement, not just the headline price. We model the full waterfall (senior debt payoff, fees, working capital peg, escrow, earnout) before we go to market so the seller knows what the actual wire will look like under different deal structures.

On every sell-side engagement, we run a pre-LOI funds-flow projection showing three scenarios: a 100 percent cash deal, a typical structure with 10 percent escrow and 15 percent earnout, and an aggressive seller-friendly structure with R&W insurance replacing most of the escrow. The right structure is rarely the one with the highest headline number. It is the one that maximizes risk-adjusted net proceeds to the seller after the waterfall runs.

Related Questions

How long does it take to actually receive the money after the sale closes?

Cash at close hits the seller’s bank account the same day as closing, typically by 5pm Eastern, assuming the buyer’s bank wires funds before the Fed wire cutoff (6pm ET). Escrow holdbacks release on the schedule defined in the purchase agreement (most commonly 50 percent at 12 months and 50 percent at 18 to 24 months). Earnouts pay as milestones are certified, usually 30 to 60 days after the measurement period ends.

Who pays off the SBA loan when the business sells?

The buyer’s closing agent pays the SBA lender directly out of the closing wire using the payoff letter the lender provides 5 to 10 business days before close. The seller never touches that money. If the deal does not generate enough cash to fully pay off the SBA loan, the seller has to bring cash to close to cover the shortfall, or restructure the deal to include assumption of the loan (rare, and requires SBA approval per SOP 50 57 2).

What happens to the company’s cash on the balance sheet at closing?

Most deals are structured as cash-free, debt-free, meaning the seller keeps all cash on the balance sheet and pays off all debt at close. The buyer takes the operating company without cash or debt. The working capital peg excludes cash from the calculation. So on a $10M cash-free debt-free deal where the company has $500K of cash at closing, the seller takes the $500K plus the cash-at-close proceeds. If the deal is structured cash-included (rare), the cash is part of the purchase price.

Can the buyer claw back money after closing?

Yes, through three mechanisms: a working capital true-up (calculated 60 to 120 days after close based on actual balance sheet figures), an escrow claim against the holdback for a rep and warranty breach, or a separate indemnity claim that exceeds the escrow if the purchase agreement provides for it. The standard cap on seller indemnity is the escrow amount, but uncapped indemnity often applies to fundamental representations (title, authority, taxes), fraud, and intentional misrepresentation.

What happens if the buyer cannot pay the earnout?

Earnouts are general unsecured obligations of the buyer unless the purchase agreement provides for security (a letter of credit, an escrow, or a parent guarantee). If the buyer’s post-close performance is poor and the buyer cannot pay, the seller is in line with other unsecured creditors. Sellers negotiate acceleration clauses (the earnout becomes immediately due on change of control, bankruptcy, or sale of substantially all assets) and security mechanisms during the LOI and purchase agreement drafting, not after the fact.

What to Do Next

The waterfall is fixed in the purchase agreement. Once that document is signed, the order of payment and the size of each layer are locked. The negotiating windows are during LOI talks (escrow size, earnout structure, working capital peg) and during the purchase agreement drafting (indemnity caps, basket and deductible, survival periods, R&W insurance, acceleration triggers). Owners who walk into LOI negotiations understanding the full waterfall consistently keep two to four percentage points more of the headline price than owners who do not.

If you are within 12 months of selling a business in the $3M to $50M enterprise value range, the modeling work to project your actual cash-at-close should start now, before any banker conversations begin. See our companion guides on how to structure a letter of intent and how to compare multiple offers for the negotiation playbook.