Rollover Equity: The Deal Structure That's Reshaping How Businesses Change Hands

If you're considering selling your business—or buying one—you've probably heard the term "rollover equity" thrown around. Maybe a private equity firm mentioned it in preliminary discussions. Maybe your business broker suggested it as a way to "bridge the valuation gap." Or maybe you're just wondering why everyone seems to be talking about it.

Here's what you need to know: Rollover equity has gone from a niche deal structure to the new normal, especially in transactions between $5 million and $50 million. According to recent market data, nearly 68% of private equity deals now include some form of rollover equity—and that percentage is climbing in the lower-middle market.

But what exactly is it? How does it work? And should you consider it for your transaction?

Let's cut through the jargon and get to what really matters.

Imagine you're selling your business for $10 million. In a traditional sale, you'd receive $10 million in cash at closing (minus taxes and fees), shake hands, and walk away.

With rollover equity, the deal looks different:

Think of it this way: You're selling the majority of your business for cash today, while keeping a seat at the table for tomorrow's growth.

The promise? If the buyer successfully grows the business and sells it again in 5-7 years, your $2 million rollover stake could be worth $4 million, $6 million, or even more. That's the famous "second bite of the apple."

If you're selling your business, you'll increasingly encounter buyers—particularly private equity firms—who not only suggest rollover equity but may actually require it as part of their offer. Here's why:

When you agree to roll 15-20% of your proceeds back into the business, you're sending a powerful message: "I believe this company has significant growth potential under new ownership."

Buyers view this as proof you're not hiding problems or inflating the valuation. You're literally betting your own money on the business's future success.

For many businesses—especially founder-led companies—the seller IS the business. Customer relationships, employee loyalty, vendor partnerships, and operational know-how walk out the door if you do.

By keeping you as an equity partner, buyers ensure you're motivated to help with the transition, share critical knowledge, and maintain continuity. You're not an employee anymore; you're a co-investor working toward the same goal.

Let's be blunt: money isn't free anymore. With interest rates higher than they've been in 15 years, buyers can't borrow as cheaply as they used to. Private equity firms sitting on $2+ trillion in dry powder need to deploy capital efficiently.

If a PE firm can acquire your $10 million business with only $6 million in equity (because you're rolling $2 million), they've suddenly improved their return on investment significantly. This capital efficiency lets them either pay you a higher total price or pursue the deal when they otherwise couldn't.

Translation: Accepting rollover equity can actually increase your total transaction value by 10-15% compared to all-cash offers.

Now let's flip the script. You've built this business. You've sacrificed. You're ready to cash out. Why on earth would you take less money at closing and stay tied to the business for another 5-7 years?

Here's the case for it:

Let me show you real numbers from a deal I studied:

The Setup:

What Happened Next:

The Seller's Return:

That seller made more from the rollover than from the initial cash payment. And it took five years, not twenty.

When structured properly (under IRS Section 721 or 351), rollover equity allows you to defer capital gains taxes on the rolled portion until the future sale.

Simple math:

That $500,000 stays invested and compounds. The time value of money is real, and it favors the rollover structure.

(Disclaimer: Tax treatment depends on deal structure and your personal situation. Always consult a tax advisor before making decisions.)

For many business owners, the decision isn't binary—it's not "stay and run the business" versus "sell and disappear."

Rollover equity gives you a middle path:

You can step back from day-to-day operations while maintaining a financial stake in what you built. For the right seller, that's the ideal exit.

I'd be doing you a disservice if I made rollover equity sound like free money. It's not. There are real risks, and you need to understand them before signing anything.

Once the deal closes, you own 15-20% of the company. The buyer owns 80-85%. That means:

You might disagree with their strategy. You might hate the new management they bring in. You might want to exit after 3 years, but they want to hold for 7. Too bad—you're along for the ride.

That $2 million rolled over? You can't access it. You can't sell your shares to anyone else (most agreements prohibit transfers). You can't force the company to buy you out.

Your money is illiquid until the buyer decides to sell the company again—which might be 5 years, 7 years, or longer. The median private equity holding period hit 6.5 years in 2023.

If you need that capital for retirement, health issues, or life changes, it's not available.

Here's where it gets technical, but stay with me because this is critical.

When you roll equity, you typically receive "common equity"—the same class the buyer holds. But the company will also have debt (bank loans) and possibly preferred equity (investors who get paid first).

If the business struggles and sells for less than expected, the money flows in this order:

Real-world horror story: A seller rolled $10M (20%) into a $50M company. The PE firm loaded $30M in debt and $5M preferred equity. The business underperformed and sold for $35M after 4 years.

The seller lost the entire $10 million.

Private equity firms are sophisticated, but they're not infallible. They can:

If the business declines in value, your rollover declines with it. There's no guarantee of success.

So given these risks, when should you actually consider it?

If you're on the buy-side—whether you're a private equity firm, search fund, family office, or strategic acquirer—here's how to make rollover equity attractive rather than adversarial:

Don't frame rollover as "we can't afford to pay you all cash." Instead, present it as a partnership opportunity:

"We see clear pathways to double EBITDA over 5 years through [specific initiatives]. We want you invested alongside us because we believe your $2M rollover could be worth $6M at exit. Here's how we'll get there..."

Show them the plan. Be specific. Build conviction.

Not all rollover equity is created equal. Differentiate your offer by providing:

These provisions cost you little but signal you're a fair partner.

If the business is worth $10M and competitors are offering $10M all-cash, consider offering $11M total: $8.8M cash + $2.2M rollover (20%).

The seller sees a higher headline number. You get the capital efficiency. It's a premium worth paying for alignment.

Don't oversell. Acknowledge:

Sellers who understand the risks make better partners than those who feel misled post-closing.

Rollover equity isn't going away—it's becoming the standard, especially as private equity activity increases in the $5M-$50M market. Rate stability is returning, dry powder is abundant, and buyers need creative structures to make deals work.

For sellers, this represents both opportunity and complexity. The opportunity: potentially doubling your total transaction value through the second bite. The complexity: understanding minority shareholder dynamics, negotiating protective provisions, and managing illiquidity risk.

For buyers, rollover equity is a powerful alignment tool when positioned correctly. It reduces capital requirements, retains critical talent, and signals shared conviction in the business's future.

The key for both parties: Treat rollover equity not as a financing gimmick but as a genuine partnership. When interests truly align, everyone benefits from the second bite.

Whether you're buying or selling, answer these honestly:

1. Is this partnership built on trust?
Do buyer and seller respect each other's capabilities and motivations? Rollover equity amplifies misalignment—it must rest on a foundation of mutual trust.

2. Is the value creation plan credible?
Can the buyer realistically grow the business 2-3x? Is the strategy specific and achievable, or just vague "operational improvements"?

3. Are the terms fair?
Does the rollover structure balance risk and reward appropriately? Are there protective provisions for the seller? Does the timeline align with both parties' goals?

If you can answer "yes" to all three, rollover equity might be exactly the structure your deal needs.

If you're considering selling your business or exploring acquisition opportunities, rollover equity will almost certainly be part of the conversation. The question isn't whether you'll encounter it, but whether you'll be prepared to evaluate it intelligently.

As someone who's been on both sides of complex business transactions, I can tell you this: the deals that work best are the ones where both parties understand the structure, negotiate fair terms, and enter the partnership with conviction, not reluctance.

Rollover equity, done right, isn't about one party winning and the other losing. It's about both parties winning bigger together.

Brett Vogeler is an author, business broker, real estate broker, and entrepreneur with extensive experience in M&A transactions across multiple industries. He specializes in helping business owners navigate complex exit strategies and structure deals that maximize long-term value.

Have questions about rollover equity in your specific situation? The conversation starts with understanding your goals, timeline, and risk tolerance. Let's talk.

[email protected]

Disclaimer: This article is for educational purposes only and does not constitute legal, tax, or financial advice. Rollover equity structures involve complex legal and tax considerations that vary based on individual circumstances. Always consult with qualified attorneys, CPAs, and financial advisors before making transaction decisions.

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