Authored By: Steve Prichett
Rollover equity can play a key role in middle-market M&A. If carefully structured, it offers an opportunity for owners to unlock additional value. Understanding how rollover equity fits into a deal and whether it aligns with your long-term goals is essential when assessing your options.
What is Rollover Equity in an M&A Transaction?
When purchasing a business, a buyer will often form a new company (often referred to as “NewCo”) to own the acquired business after the transaction. Rollover equity occurs when a seller reinvests a portion of their sale proceeds into NewCo rather than receiving that portion of the consideration in cash at closing. It can be a strategic tool during a transaction that benefits both buyers and sellers.
The Benefit to Buyers
For buyers, rollover equity can be an effective tool to ensure the seller remains actively involved and incentivized to grow the business post-close. Because rollover equity represents a portion of the purchase price that the seller does not receive in cash, it can also serve as a creative lever for buyers to reduce the capital required to close the deal.
The Benefit to Sellers
For sellers, participation in future growth, often referred to in the industry as “a second bite of the apple,” can make rollover equity a more attractive non-cash alternative to earnouts and seller notes.
“Second bite of the apple” refers to the opportunity for a seller’s rollover equity to appreciate as NewCo grows in value. If NewCo is eventually sold at a higher valuation, the seller may receive a larger payout than if they had foregone the equity rollover in the initial transaction and received strictly cash.
How to Consider Rollover Equity in Your Transaction
Depending on the seller’s post-close goals, rollover equity is either a welcome addition or a non-starter. Deciding on rollover equity as part of deal proceeds demands careful consideration of several factors, including:
- Valuation and the Track Record of Your New Partner: Know the valuation at which your equity is rolled, understand the key drivers behind it, and compare it to other investors. Understand whether the buyer has a demonstrated ability to scale businesses, execute add-on acquisitions, and exit the combined entity at premium valuations, as your rolled equity is now an investment that depends on your partner’s ability to perform.
- Position in the Capital Stack and Minority Protections: Where your rollover sits in NewCo affects risk. Know if you’re getting preferred or common equity—common equity is riskier because it sits behind debt and preferred equity. Review the expected post-transaction capital stack for debt and preferred equity levels.
- Alignment of Objectives: Consider whether rollover equity aligns with your objectives. If you want maximum cash at close and to exit operations for retirement, rollover equity may not fit. If you believe in the company’s growth, want to stay involved, and can participate, rollover equity can boost long-term value.
- Tax Considerations: When structured properly, rollover equity is particularly attractive for tax efficiency. In many cases, the portion of proceeds you choose to roll may qualify for tax deferral under applicable tax rules, allowing you to postpone the recognition of gains on that portion of your proceeds until a second exit and to space out the tax impact of selling your company.
Navigating Rollover Equity – Why Advisors Matter
At its core, rollover equity is a risk-reward proposal. Cash at closing provides certainty and directly helps you achieve your financial goals from the transaction. By contrast, rollover equity offers upside potential but also invites greater risk. The right balance depends on your financial goals, risk tolerance, confidence in the buyer, and desired level of involvement post-close.
Attempting to navigate this balance within the framework of an M&A transaction while continuing to run your business can be overwhelming. At Evergreen Advisors Capital, our investment banking and valuation teams work together to help clients evaluate rollover equity before and after a transaction—ensuring clarity around deal economics, capital structure, and long-term value outcomes. If you’re considering a transaction involving rollover equity or want to learn more about the transaction process, we’re happy to connect.
Securities transactions conducted through Evergreen Advisors Capital/Member FINRA/SIPC
