The Proceeds Waterfall: Mapping Every Penny of Your Business Exit with Steven Pivnik
In this solo episode, Steven tackles a fundamental question for every entrepreneur: "How much should I sell my company for?" He argues that the answer shouldn't start with market valuation, but with a deeply personal assessment of the lifestyle the founder wishes to maintain post-exit. Assuming a worst-case scenario where the founder is unemployed after the sale, the first step is consulting with a wealth manager to determine the principal needed for conservative or aggressive investments to generate the required ongoing cash flow, thus maintaining the founder's current lifestyle.
Once this necessary takeaway number is established, Steven introduces a crucial planning tool: the "Proceeds Waterfall." This detailed breakdown tracks every expense that reduces the final proceeds, starting with the enterprise value paid by the acquirer and accounting for everything from legal and accounting fees to payouts for minority shareholders, advisors, and, critically, tax liabilities (including federal and state taxes). By working backward from the desired bottom-line number, entrepreneurs can determine the necessary enterprise value and create a strategic game plan to bridge the gap between their current valuation and the required sale price. Doing this homework minimizes surprises and stress when the transaction finally closes.
Takeaways:
- Define Your Target Lifestyle First: Before looking at market comps, sit down and define the exact lifestyle you want to lead post-exit. Your desired number should be based on your personal financial needs, not just market trends.
- Consult a Wealth Manager: Work with a financial professional to determine the exact lump sum (principal) needed to generate the ongoing, required cash flow to sustain your lifestyle after the sale.
- Create a Proceeds Waterfall: Develop a comprehensive spreadsheet that starts with the hypothetical Enterprise Value and meticulously tracks all outgoing payments, including legal fees, accounting costs, board member payouts, minority shareholder distributions, and stock option holder expenses.
- Factor in Taxes Realistically: Do not underestimate the tax burden. Include estimates for both federal (Uncle Sam) and state taxes, especially if your business has nexus in multiple states, as this will significantly reduce your net proceeds.
- Calculate the Required Enterprise Value (Work Backward): Use the Proceeds Waterfall to determine the minimum top-line valuation (Enterprise Value) needed to achieve your non-negotiable bottom-line number (the cash you walk away with).
- Build an Exit Game Plan: Once you have the required Enterprise Value, compare it to your company’s current valuation. Create a strategic plan focusing on growth and profitability metrics to bridge that gap and reach the necessary sale price.
Quote of the Show:
- "The more homework you do on truly understanding... where every single penny is going to go and how much and when, the fewer surprises and less stress the transaction will result in." - Steven Pivnik
Links:
- LinkedIn: https://www.linkedin.com/in/stevenpivnik/
- Personal Website: stevenpivnik.com/
- Company Website: aipadvisory.com/
- Book Link: https://a.co/d/dk1P4kG
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