Pricing Follow-On Equity for Tuck-Ins

March 10, 2025

by a searcher in New York, NY, USA

I’m working on a roll-up model and am trying to think through how to price follow-on equity and account for dilution.

Example: let's say we acquire a business with $1 million EBITDA, then acquire individual tuck-ins of $1 million for 5x EBITDA each. Then the consolidated platform exits for 10x.

This requires some equity financing in addition to debt financing with each acquisition.

• At what valuation would follow-on equity investors come in? Do you apply a multiple to the pro forma business, and I assume this would be a markup to the tuck-in multiple? • How should I think about dilution for this follow-on equity? • What return profile would investors be targeting?
• If we were to raise an SPV after doing our first deal, is it common to work out what the pro forma entry multiple would be ahead of time for dilution purposes for capital commitments?
Any practical frameworks or examples would be greatly appreciated!

Reply by a searcher
from University of Pennsylvania in New York, NY, USA

Couple ways to do this and depends on the preference between the different series / classes of equity. I don't think there's a clear answer and each have their own pros & cons. I think of this in terms of "how does the upside on the arbitrage between platform & tuck-in multiple gets shared between existing and new investors?" and "how can disagreements over valuation be minimized?". That'd be the framework / questions I'd work with as I try to design something that makes sense for everyone

Reply by a professional
from University at Albany, State University of New York in Delray Beach, FL, USA

I specialize in helping entrepreneurs executing a rollup. Depending on your background, team, sector, etc., there's probably a better way to do everything you're currently thinking about :) Reach out privately since you're anonymous and I don't see your LinkedIn details.

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