How to think about equity rollover?

April 17, 2025

by a searcher from University of KwaZulu-Natal in Vancouver, BC, Canada

I am currently looking at a potential deal in British Columbia (early stages of discussion with owner), if the owner wants to retain an equity stake and participate in the growth, how would you value the equity rollover? I've seen two methods referenced (as a % of EV or as a % of equity value). Using a % of EV is the most attractive for me as the buyer, but I would have thought that % of equity value would be expected (intuitively this make more sense to me) E.g., $10M deal with $3M equity rollover. NewCo = $5M equity/$5M debt If valuing at EV then rollover = 30% of equity in NewCo ($3M/$10M) If valuing at equity value then rollover = 60% of equity in NewCo ($3M/$5M) What is 'fair' in this scenario?

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Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

Thanks for the tag ^redacted‌. Agree with ^redacted‌. If there is debt in the capital structure, the percentage rolled over refers to equity value, never enterprise value. Write the LOI language clearly and have a conversation with the seller or seller's advisor to confirm that seller's understanding and yours are the same.

Reply by a searcher
from Harvard University in Manhattan, New York, NY, USA

TLDR, Option 2 sounds bad, and you need to differentiate the pools of equity capital. There is you the searcher (Active Operator, control rights, often majority equity stake; the GP), passive investors (LPs), and active equity-incentivized individuals i.e. 'active and invested, non-controlling' for lack of a better term. These 3 bodies generally get different economic deals, as they've made different commitments or have different levels of control/risk. "Fair" has a lot to do with A) market and B) what type of investor they are and what their expectations are in the business post-close. If they are fully passive and looking for a ticket on the roll-up ride or growth ride, I'd directionally treat them the same way you would treat any equity investor and pitch them on a return profile, often discussed in IRR or multiple of invested capital and the character of the return, i.e. cashflows & distributions or some large terminal value exit or some combinations, etc. To point A, there is a market for this right? and that $3m they could have cashed out all the way and put into stocks &/or bonds so you are essentially vying for the capital promising a better or more juicy story. I'd mark it to what you would have to do to raise the $3m equity from a passive investor +/- and that should be a solid return because people have high return targets down here. If they NEED to roll equity to even offer the business for sale, and yet they will be passive post-close, then I suppose it's not quite a "super motivated" seller, and you need to negotiate away value from your pocket into theirs, one way or the other, to secure access to the transaction if you care to. If they are rolling equity and actively involved in the business post-close, then there often will be an accompanying employment agreement and clear set of standards and expectations as they go from "owner" status to now effectively an equity-incentivized employee. The key evolution in their relationship here, even if they remain active in their role, will be their relinquishing of fundamental controls to the new ownership structure (and obviously you who now owns & legally manages the business; you or your board, etc.). I assume they are passive because in your example you cash them out for $7m, and not to go too far down the rabbit hole, but it's probably a bad idea to put $7m on someone's personal books and expect them to be ETA sweaty with you, but that's just conjecture given this is all proposed as a thought experiment...

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