Hi all,

I wanted to get your thoughts on how you calculate seller rollover. I have seen two ways of calculating this, with no consensus:

Assume a company is valued at $10 million EV with no debt on the business. I buy out 60% of the company through a stock purchase with the intention of having the seller retain 40%. I'm going to be funding the acquisition with 50% debt:

1) I pay the seller $6 million dollars to buy out the 60% ownership, then they hold 40% of the company thereafter. The overall capital stack is $5 million of debt and $5 million of equity. This means they are effectively getting $6 million of cash + $2 million of equity = $8 million of total economics.
2) I pay the seller $10 million at close and they effectively "reinvest" (no cash changes hands) such that they buy back 40% of the equity in the new capital structure. This is 40% x the $5 million of equity = $2 million rolled over. This means the seller keeps $8 million of cash, then plus $2 million of equity = $10 million of total economics.

What do you see more commonly? I can see arguments for both. Number (1) was a method preferred by a broker and seller when I was approaching LOI on a deal recently, and Number (2) was how an investment firm partner told me he structured his deals. In scenario (2), he would incorporate seller note so that the seller would get economics proportionate to their rollover (i.e., in this scenario, the seller would get $6 million at close, get a $2 million seller note, and then roll over the $2 million into the 50/50 structure to have 40%.