Understanding Rollover Equity

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For the right transaction, a rollover of equity can add value for the buyer and the seller. Rollover equity is ownership in the buyer or its affiliates that is issued to a seller as payment for all or a portion of the purchase price for a business.

For a buyer, rollover equity spreads the risk of the business’s post-closing operations among the buyer and sellers. Additionally, sellers may be more motivated to contribute to the business’s future growth due to their continued ownership. Paying a portion of the purchase price by issuance of rollover equity also reduces the amount of cash that the buyer needs to acquire the business.

For sellers, rollover equity can provide them with the proverbial second bite at the apple. Particularly when sellers are confident in the buyer’s strategy for the business, they may want an equity stake that will enable them to participate in the business’s growth under the buyer’s control. Depending on the structure of the transaction, sellers may also receive the rollover equity on a tax-free basis, deferring the realization of some capital gains until a later sale of the rollover equity.

In deciding whether to accept rollover equity as a part of the purchase price for their business, sellers should recognize that rollover equity often has only economic rights, with little to no voting or information rights. In addition, many levels of senior capital investors are typically entitled to receive preferential payments before rollover equity will receive any dividends or participate in the proceeds of an exit. For these reasons, faith in the buyer, and the likelihood for the business’s success under the buyer’s direction, are critical for a seller in considering a rollover equity proposal.

Read our articles on earn-outs and understanding a buyer’s expectations for a post-closing engagement for more information. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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