What Is Rollover Equity?

Josh Moore

Sellers Seller Articles Seller FAQ

Have you heard the phrase rollover equity? Maybe a fellow business owner recently sold their company to a private equity group (PEG), or you’ve received an unsolicited offer from one.

If so, you’re probably wondering what it is and what it means for you.

Rollover equity is a common component of any transaction with private equity.

As of 2021, nearly 50% of all businesses are being sold to PEGs, and that number continues to increase every year. Today, private equity is managing over $4 trillion in total assets, with 1.5 trillion in committed cash looking for businesses to purchase.

As a business owner, you need to understand private equity and how they structure deals.

At MidStreet, we’ve worked with several business owners who have sold to PEGs. We’ve seen instances in which equity rollovers were required, optional, or not even part of the deal.

In this blog, we’ll explain what an equity rollover is, discuss the benefits they offer private equity groups and business owners, as well as some of the potential drawbacks.

Let’s hop in!

What is Rollover Equity?

Rollover equity refers to a portion of the proceeds from the sale of your business that you reinvest into the company the buyer uses to acquire their business.

Most private equity groups prefer sellers roll over at least 20% of their proceeds into the company post acquisition. Let’s look at an example scenario:

You’re the owner of a manufacturing company experiencing substantial growth. To handle this growth, you feel you might benefit from additional resources and assistance.

You would like to continue growing the company, but don’t want to take all of the risk by yourself. So, you decide to seek out a partnership with a private equity group. You find a great fit and they offer to buy your business for $10 million.

In their offer, they request that you roll over at least 20% of the proceeds from the sale. Instead, you decide to roll over 30%. On the day of closing (before factoring in customary transaction fees or taxes) you will take home $7 million, and re-invest the remaining $3 million into the private equity group’s holding company.

You now hold a minority stake of 30% in the company as a result of rolling over your equity.

Pros of Rollover Equity

You may be asking yourself, “why on earth would I sell my business to someone, only to turn around and give them some of their money back?” When you put it that way, it doesn’t sound too appealing.

But let’s look at this with the future in mind.

Once you sell your business, you’ll probably celebrate by going on a nice vacation, buying that boat you’ve been talking about for years, or maybe submitting an offer on the beach house you’ve driven past 100 times.

But then what?

Most business owners look to reinvest a large portion of their sale proceeds. So why not put your money to work with a group of sophisticated investors and continue benefiting from the business you built?

Rollover equity can come with several benefits to sellers, especially if they aren’t ready to retire. Let’s look at some of the benefits you could enjoy if you roll over part of your proceeds after the sale.

Chips off the Table

Taking “chips off the table” simply means extracting some of the value you’ve built through years of business ownership. If you’ve been “all in” since day one, it might be time to bank some of those winnings.

A Second Bite of the Apple

The number one benefit to rolling over equity after selling your business is the opportunity to get what we call “a second bite of the apple” when the PEG sells your business again in the future.


Private equity groups generally buy companies to grow and sell them in three to five years.


Let’s go back to that manufacturing company example from earlier.

The private equity group that bought your manufacturing company has one goal in mind: provide a return to their investors. And often, they do.

According to McKinsey & Company’s private markets annual review, in 2021 the average internal rate of return (IRR) for private equity groups reached 27%, beating the returns of all other private market asset classes.

Since you rolled over $3 million (30% of the purchase price) you now own a minority stake in the company, and get to tag along for the ride.


Depending on the private equity buyer you sell to, you may or may not be required to retain an active role in the company as a consultant, manager, or director. The good news is that either way, you'll get a return on your rollover investment. But, if you do retain an active role in the company, you can add a s alary into the mix, which only sweetens the deal.


Fast forward four years after you sold your manufacturing company. With the private equity group’s sophisticated team and access to capital, you were able to help double the company’s value.

That’s right. The company you sold for $10 million is now being sold again for $20 million.

Now comes the fun part. Remember that $3 million you rolled over into your company after selling it? After four years of staying with the company and holding that minority stake, that $3 million has turned into $6 million.

So, let’s do some math. On the first sale of your business, you were able to put (roughly) $7 million in your pocket. After performing an equity rollover of 30%, you get to take home an additional $3 million four years later ($6 million payout - $3 million initial rollover).

You could have said “no thanks” to the private equity group, sold to someone else for a one-time $20 million payday, and sailed off into the sunset.

But, since you agreed to an equity rollover, you’re able to pocket an additional $3 million instead only four years later.

The even more exciting part? If opportunities align, you can reap the benefits of rollover equity two to three more times in the future as your business is cycled upward through more sophisticated private equity groups.

Historic Success

Another benefit that comes with rollover equity is the likelihood of a successful partnership.

Private equity groups routinely buy, grow, and sell businesses for a profit. Successful acquisitions are the main way they generate returns for their partners (or investors).

If a private equity group conducts due diligence on your business and makes an offer, it usually means that they are confident they can sell your business for a profit in the future. In other words, if they believe they can grow your business, it’s probably safe to assume they can.

That said, not all private equity groups are created equal. It’s important to work with an experienced M&A advisor to vet the private equity group and prevent you from putting your business at risk.

Reduce Your Risk

Are you the personal guarantor for most of your business’s liabilities? Are you tired of carrying all the risk of business ownership on your shoulders?

If so, an equity rollover may be just what you’re looking for. Becoming a minority stakeholder in the business you built is a great way to enjoy the benefits of its growth, while diversifying your personal risk.

You won’t shed all liabilities, since selling the company will require you to make certain representations and warranties. But, you will dramatically reduce your exposure to the everyday risks of operating your business.

If the company is sued, for instance, you will no longer bear the burden of litigation: that will be the buyer’s responsibility to handle.

Reduce Your Involvement

If you’ve been operating your business for many years, you may feel it’s time to to dial back your responsibilities.

Running a business is incredibly hard work, and if you’ve been doing it for a long time, then it’s possible you’re starting to feel burned out. But, that doesn’t mean you want to step away for good.

Private equity often helps business owners who are in this circumstance. They regularly acquire companies, and bring in a Chief Financial Operator, and/or an Operations Manager to help reduce your load.

In this case, an equity rollover allows you to reduce your involvement and stress, but continue doing what you love and participate in the future financial upside of your business.

How Rollover Equity Benefits Buyers

You may be wondering why a buyer would offer you the opportunity to roll over equity. There are certainly several benefits for you as the seller, but what advantages can this present to a buyer?

Aligning Incentives

When you agree to an equity rollover, you’re investing in the business and the buyer’s success.

Private Equity wants you to have some skin in the game. Reinvesting in the company and retaining a leadership role ensures you’ll help them grow the company and provide a return to their investors.

Alternatively, if you take your foot off the gas and the company declines, you’re also at risk of losing money. Aligning these incentives allows the private equity group to feel confident that you’ll continue to do a good job growing the company.

Reduced Equity Requirements

Buyers also like equity rollovers because they reduce the amount of equity (cash) that they’ll have to bring to the table to purchase your business. Every dollar that you roll over is a dollar that they don’t have to pay you for your business on the day of closing.

Since private equity groups invest in multiple companies at once, freeing up this cash gives them the ability to go out and make the next investment.

Drawbacks of an Equity Rollover

While there are several benefits to an equity rollover for both buyers and sellers, there are also a few risks and drawbacks to consider.

Bad Fit

If you’ve been running a company your way for fifteen years, and suddenly a buyer steps in and makes changes that you don’t agree with, you can imagine that this won’t go over well.

This can be true for you and your employees.

A good M&A advisor should help mitigate this risk by understanding your company’s culture, its values, and knowing what buyers fit well with them.

Looking for a full exit

If wiping your hands clean and stepping away from the business is your goal in selling the company, an equity roll over might seem more risky.

Some Private Equity groups won’t do a deal without an equity rollover. Some even require you to retain a leadership position in the company in tandem with your equity rollover (remember the alignment of incentives), so that could sour the deal for you if you’d prefer to walk away for good.

That said, many private equity groups do not require you to roll over or stay on after the sale. If you find a flexible group with a track record of success, you may be able to achieve both a full exit and roll over equity with their group.

Questions to Ask When Considering a Rollover

If it looks like a buyer is going to require an equity rollover, then there are a few questions you should ask. The requirements of one buyer’s equity rollover may not be quite as appealing as those of another, so it’s important to know what the exact terms are so you don’t get burned.

Let’s take a look at some things you should ask your buyer if they prefer an equity rollover.

1. What class of stock will I roll over into?

Depending on the structure, private equity groups offer different classes of shares for their investors and employees.

Ideally, you want to receive the highest class of shares available (Class A) in an equity rollover.

In recent years this has become the norm, but it’s important to clarify before moving forward.

2. Do I have the right to hold equity until the company is sold?

Sometimes, private equity groups will insert a “call option” in the initial draft of rollover equity terms. This stipulates that under certain circumstances, they can buy out the seller’s shares.

There are a few reasons that you shouldn’t agree to this, but the main reason is that most of your shares’ value comes from an exit, or when the company is sold again.

If you agree to be bought out before this exit, chances are you won’t get as high of a multiple on your shares as you would when the company goes to market.

3. Do I have preemptive rights for dilution protection?

Equity dilution happens when the percentage of ownership associated with a company’s shares decreases as a result of issuing new equity.

For example, let’s say a company has 5 million shares. It’s doing relatively well, so an additional 1 million shares are issued for future employees and investors. Now, the company has 6 million shares, and each share is worth 20% less.

If you’re rolling over equity, you want to make sure that you have the option to purchase a proportionate amount of new equity at the same price and terms being offered to others so that you can retain your percentage of ownership in the company.

Even then, you may not be willing or able to expend what it would cost to purchase new shares. For this reason, you should attempt to limit the rights of the buyer to do these types of transactions without your consent.

4. Will I have come-along rights?

In the event that the private equity group is selling equity, come-along rights allow you to sell your equity on a pro rata basis and with the same terms and conditions as the private equity group.

It is especially important for you to extend your come-along rights to situations in which the private equity group doesn’t complete a full exit, but instead sells a portion of its equity for value.

In addition to these more specific questions are general questions you should ask regarding your role in the company post-acquisition, and what you can expect moving forward. A few additional things you should ask are:

  • Will I stay involved in the company?
  • What will my responsibilities be?
  • What kind of say will I have in major decisions?
  • How long will it take to sell again?
  • Can I roll over equity more than once?

Understanding the Equity Rollover

With the right buyer, favorable terms, and good timing, an equity rollover could be a fantastic opportunity for you to maximize your business’s value in ways that may not be possible on your own.

On the other hand, some of the information above could have made you question whether or not a rollover is the best option for you.

If you’re still curious about private equity buyers and their strategies, check out our blog “What Is a Platform Company in Private Equity?” In it, we break down what it looks like to be acquired by private equity as a platform company.

You should also check out “7 Things to Consider When Selling to Private Equity.” It will offer you some detailed information that will help you decide if selling to private equity is right for you and your business.

If you still have questions about equity rollovers and would like to have an in-depth discussion about what one could look like for you, contact us today.

We’ve worked with some owners who decided that a rollover wasn’t appealing to them, and some who decided it was exactly the kind of transition they were looking for. Either way, we’d be glad to help you determine your next move.

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