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Punching Out: Understanding Rollover Equity

With the rise in the influence of private equity (PE) firms (which I affectionally joke now means “practically everything”), rollover equity has become more common in M&A deals. According to GF Data, 28.6% of deals in the first three quarters of 2024 included rollover equity¹. Many private equity deals in the PCB, EMS, and other industries include rollover equity.  

Rollover equity means the seller invests, or “rolls,” a portion of the deal’s proceeds into the entity that is purchasing the company. Often, a buyer will set up a separate LLC to purchase the seller’s assets. If the buyer is a larger company making a strategic acquisition, the buyer may invite the seller to invest in their company. PE firms can also invite the seller to invest some of their proceeds into the PE’s fund, adding more diversification.

There are several potential benefits to rolling over equity. Confirm with your CPA, but rolling over equity could defer taxes on that portion of the deal, meaning you may not owe taxes until you sell that portion, possibly years later. PE firms like the concept because they want the seller’s goals to be aligned with the buyer’s. While most sellers say they want the company to succeed, there is nothing like putting your money on the line to make sure the seller attends every Monday morning Zoom meeting. Additionally, rolling over some proceeds of the deal can help convince the buyer to improve other terms, such as escrow, reps, and warranties, because it shows confidence in the company on the seller’s part.

The amount of rollover equity varies between 10 and 40% of the deal’s proceeds. Less than 10% is somewhat rare because it is not enough to matter. Typically, if a seller is looking to retire, they prefer a lower amount of rollover equity. If the seller is younger, plans to stay in the business, and is looking for the proverbial “second bite at the apple,” they may wish to roll over a higher percentage of equity. Rolling over more than 40% is rare because the seller will be a majority owner, which is a different type of transaction.

PE firms and other buyers typically want a portion of the deal to be deferred until after the closing. The most common type of deferred payment is escrow, which is usually between 5–20% of the deal, with a term of six months to two years and bears interest to the seller. Another type of deferred payment is an earn out, which offers the seller some upside if the business does well after closing. A third deferred payment is a seller note, where a portion of the deal is in the form of a note, usually between two and 10 years. The term usually must be as long as the senior debt, and interest/principal payments may depend on the terms of the senior lender. A seller note may be less risky than an earn out or rollover equity, but there is usually little or no upside. Most offers include one or more types of deferred payments. Before getting into M&A discussions, owners should be familiar with the different options. Here is an example of how rollover equity works:  

If the offer is for $10 million, the rollover equity is $2 million, and escrow is 10%, the seller would receive $7 million at closing (less fees and taxes). The seller will own $2 million worth of stock in the buying entity. If the buying company has borrowed senior and junior debt, the $2 million investment may be more than 20% equity. However, more deals will dilute that equity as the buyer undertakes them. 

The hope is that the buyer will grow the company and obtain a higher multiple when they eventually sell, giving the seller a higher return on the rollover equity investment. Since many PE firms have a positive track record of providing returns to their investors, rolling over equity can be a solid bet.  

Although rollover equity has the growth potential, it carries a level of risk. If a seller is considering accepting rollover equity as part of the deal, undertake due diligence on the buyer, their growth strategy, and what the company will look like post-transaction. Consult with your legal and financial advisors. Rollover equity can provide an extra return on the proceeds of the deal, but it can be risky and consume more of the seller’s time post-closing. Hopefully, the second bite of the apple will be super-sweet and not half a worm.

References

1. “Small Deals Big Factor in Middle-Markeet Private Equity in 2024,” by Bob Dunn, Middle Market Growth, Jan. 21, 2025.

Tom Kastner is the president of GP Ventures, an investment banking firm focused on sell-side and buy-side transactions in the tech and electronics industries. GP Ventures has offices in Chicago and Tokyo, with five people in total. Tom Kastner is a registered representative of, and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida, member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.