In the U.S. middle market, rollover equity has become an integral piece of many private equity (PE) transaction consideration structures whereby the seller exchanges some or their equity interest in the acquiring entity.
From the buyer’s perspective, rollover equity helps finance a transaction and should secure the seller’s support on a go-forward basis. Sellers benefit through a mix of direct liquidity and future upside—the so-called “second bite of the apple”—often enhanced by deferred tax treatment of the rolled proceeds.
The use of rollover equity in middle market deals has become more prevalent in recent years. According to Goodwin’s Private Equity Deal Database, the inclusion of rollover equity in transactions valued between $25 million and $500 million rose from 46% in 2020 to 57% in 2023.
This uptick reflects both the financing pressures facing PE buyers and the desire for alignment of incentives between new owners and ongoing management teams. Practitioners caution, however, that valuation and structural nuances can materially affect economic outcomes. For instance, disparities between rollover equity and PE-sponsor securities—such as liquidation preferences or senior rights—must be carefully valued, typically using the option-pricing method (OPM) under ASC 805, and may warrant discounts for lack of marketability.
As rollover equity becomes more prevalent, both buyers and sellers must engage in diligence regarding valuation, capitalization table dynamics, and exit expectations to fully assess its long-term impact.
Since 1982, Mercer Capital has offered M&A advisory services to a diverse range of public and private companies, leveraging extensive valuation and investment banking experience to guide clients through complex transactions. While our team provides objective advice, we also advocate for our clients while navigating the competitive marketplace of private equity groups, family offices, and strategic buyers. We facilitate informed decision-making with a tailored, multi-phased approach to planning and executing transactions. For confidential consultation on your transaction-related needs, contact us today.
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