Exit waterfalls — where the sale price actually goes

When a PE-backed company sells, the headline price is the start of the story, not the end. Proceeds flow through a strict queue — the waterfall — and what reaches each shareholder depends entirely on where their instruments sit in it. Two managers at identical companies with identical percentages can take home very different amounts because of what's above them in the queue.

The queue, in order

A typical private-equity waterfall runs:

1. External debt — the bank gets repaid first, including any prepayment costs.
2. Transaction costs — advisers, warranty insurance, the deal machinery.
3. Institutional loan notes / preference shares — the PE fund's quasi-debt, plus its rolled-up interest. This is often the largest single layer, and the interest compounds quietly the whole holding period.
4. Any ratchet or catch-up mechanics — adjustments that shift value between investor and management depending on the outcome achieved (see our ratchets guide).
5. Ordinary equity — whatever remains, shared across the ordinary share classes, which is where sweet equity and growth shares live.

Why the middle of the queue matters most

For management, the swing factor is usually layer 3. Suppose the fund invested £60m as loan notes at 10% rolled-up interest. After five years that layer claims roughly £97m before ordinary shares see anything. At a £150m exit the ordinary pool is healthy; at £100m it's thin; at £95m it may be nothing — all with the same "5%" on your certificate.

This is also why net debt at exit deserves attention. Every pound of bank debt still outstanding is a pound off the top of the waterfall, so a business that de-levers during the hold quietly moves value down the queue toward you.

Escrows, earn-outs and the gap between signing and cash

Even your layer's share doesn't all arrive on completion day. Sale agreements commonly hold back an escrow against warranty claims (released a year or two later, if unclaimed) and sometimes an earn-out contingent on future performance. The honest way to read an offer is as a package: cash now, escrow probably-later, earn-out maybe — each with different risk.

Reading your own waterfall

You need four inputs, all knowable: enterprise value (or a range), net debt, the loan-note/preference terms including accrued interest, and your class rights from the articles. With those, the waterfall is arithmetic — and running it at three exit values (conservative, plan, stretch) shows the shape of your outcome far better than any single number.

FAQ

What's the difference between enterprise value and equity value?

Enterprise value is the price for the whole business; equity value is what's left for shareholders after net debt. Offers are usually quoted on enterprise value, but everything that matters to you happens in the equity-value column.

Do all ordinary shares receive the same amount per share?

Not necessarily — different classes can carry different rights, hurdles (growth shares) or ratchet adjustments. The articles of association set the per-class arithmetic.

What happens to my unvested equity in a sale?

It depends on the documents: some accelerate vesting on exit, some roll unvested awards into the buyer's structure, and some repurchase them at the deal price or at cost. It's one of the first questions worth asking the moment a process starts.