Unveiling the Power of Rollover Equity: Empowering Founders, Entrepreneurs, and Business Owners in M&A

How to use an equity rollover to create generational wealth.

Rolling Equity 101

What a journey and thrill it is to build a successful business from the ground up, riding the waves of challenges overcome and successes achieved. You've invested unimaginable time and energy, tied up your personal wealth in the business, and have placed yourself in a position to consider taking some chips off the table through an exit. However, many entrepreneurs see selling the business as the final mountain to climb, but struggle with the reality of post-exit regret or a feeling of lost purpose so you want to make sure you are making the right choices for you, your employees and your family.

Fortunately, the world of mergers and acquisitions (M&A) offers an enticing opportunity that enables founders to have their cake and eat it to - it's called rollover equity, and if negotiated with the right buyer, rollover equity can help business owners create meaningful financial liquidity and ride the wave of future growth and financial success.

In this article, we will explore the substantial benefits and crucial considerations of rollover equity, commonly referred to as the "second bite of the apple." Join us as we dive into the profound implications of rollover equity for founders, entrepreneurs, and business owners.

What Is An Equity Rollover?

"Rolling equity" is a common practice in private equity investing. It occurs when a private equity firm invests in a company and the company's founders or management team agree to roll over some or all of their equity into the new company or entity. This means that the founders or management team will continue to own a stake in the company, but they will now be minority shareholders.

There are several reasons why founders or management teams might choose to roll over their equity:

  1. A strong believe or conviction in the long-term of the company, and its future prospects as part of a private equity platform

  2. They may believe that they can contribute to the company's success by staying involved

  3. Rolling equity can be a way for founders or management teams to reduce their personal risk profile and cash out some of their ownership stake, while still maintaining a connection to the company and the potential for significant long-term upside

There are also a few risks associated to working with private equity firms to roll equity.

  1. Choosing the right private equity buyer can be difficult and dangerous - if chosen poorly, founders may end up watching their businesses and the potential for financial upside go up in smoke. For this reason, it is vital for founders, entrepreneurs, and business owners to carefully evaluate the buyer's credentials, industry expertise, and long-term vision to minimize the inherent risks associated with rolling over equity.

  2. The private equity firm may not be able to successfully drive towards the long-term financial outcome the investors are expecting. In this case, the founders or management team may lose a significant portion of their payout.

  3. Rolling equity will dilute the founders' or management team's ownership stake and control of the business. Often times, this is difficult for CEOs of founder-led businesses to accept, even if they've chosen this path

Additional M&A Resources: Listen to Peter Bray's story of building a successful business, and the unfortunate decision to sell to the wrong Private Equity firm.

How To Use Rollover Equity To Your Own Advantage

Let's dive into the remarkable advantages that come with embracing rollover equity in a private equity transaction. When founders roll over their equity into a new company (or platform), they become more than mere spectators—they become active investors in its future success. This infusion of the platform's expertise, experience and capital can significantly enhance the value of the business, igniting a ripple effect of growth and prosperity.

Moreover, rolling over equity has the power to supercharge your motivation and therefore the momentum of a business. Founders who have a personal stake in their company's triumph are incentivized to put in the extra effort required for exponential growth. This heightened dedication leads to accelerated business expansion, generating increased profits and transforming aspirations into tangible achievements.

But there's more to this story. Rollover equity is not just about financial gains; it fosters an environment of trust and collaboration. When founders have a vested interest in the business's success, they are more inclined to cultivate open and honest communication with investors. This authentic bond between founders and investors nurtures a symbiotic relationship, benefitting both parties and laying the foundation for long-term prosperity.

To reenforce this point, on a recent episode of the Cashing Out podcast, Adam Coffey talks about the benefits of taking multiple bites of the apple. "The first time you sell your business, you get a really nice payday, depending on how big it was. But it's life changing when you sell the company the second or third time. And you're doing it by riding the coattails of the world's most sophisticated asset class. And you're using their capital to grow it faster. You're perfectly aligned. They make money, you make money. And it's a beautiful thing when it works well."

Using Rollover Equity To Build Generational Wealth

"When rolling over equity into a new entity, it can be challenging to fully understand the implications on the other side," explains April Anthony, a seasoned entrepreneur and self-made billionaire. "You have to mentally prepare yourself to be okay with the unknown. Even if things don't go exactly as anticipated, you should feel confident in your decision. Consider that you're playing with house money, and if the outcome isn't as expected, you've already made peace with it. In my mind, I always write it off as house money at that point. And even if I walk away, I still walk away with a good return on my initial investment," she emphasizes. This perspective highlights the importance of being comfortable with relinquishing control and acknowledging the inherent uncertainties that arise when partnering with a buyer in the rollover equity process.

While the prospects of rollover equity are undeniably enticing, approaching this opportunity with meticulous care and strategic forethought is essential. Let's uncover some valuable lessons that will guide you on this transformative journey:

  1. Clarity in the Purchase Agreement:

    Before embarking on the rollover equity path, founders must immerse themselves in the intricacies of the agreement with their new partner. A comprehensive understanding of their rights and obligations is crucial to ensuring a harmonious partnership. An experienced M&A attorney should be hired to properly support this process and should be the #1 priority of a seller's management team.

  2. Charting Your Exit Strategy:

    Every successful adventure requires a well-thought-out plan. Founders must define their exit strategy, considering when and how they intend to part ways with the business. This foresight empowers them to make informed decisions about the extent of equity rollover and the type of agreement they enter into.

  3. Building a Resilient Management Team and Succession Plan:

    An exceptional business is not reliant solely on its founders. It necessitates a capable and skilled management team that can steer the ship even when the founders step away. By ensuring the business's continuity and success, founders can spend less time within the business and still have confidence that their equity is in good hands.

Additional M&A Resources: Listen to an interview with April Anthony, in which she details how she structured multiple deals and bites of the apple to create generational wealth.


In the realm of mergers and acquisitions, rollover equity holds immense potential for founders, entrepreneurs, and business owners. By embracing this strategy, you can savor the fruits of increased business value, accelerated growth, and fortified relationships with investors. However, the road to success is paved with due diligence and careful considerations. Balancing ambition with prudence, you will unlock the full potential of rollover equity—a gateway to a new chapter of entrepreneurial triumph.

Your Questions Answered By M&A Experts:

Is an earnout the same thing as rolling equity?

While they both involve the financial arrangements during a transaction, they serve different purposes and have distinct characteristics.

Earnout: An earnout refers to a contractual provision in an M&A deal that links a portion of the purchase price to the future performance of the acquired business. It is designed to bridge valuation gaps when there is uncertainty or disagreement about the company's future financial performance. Typically, an earnout specifies certain performance milestones or targets that, if achieved, trigger additional payments to the seller. Earnouts are often used when the buyer and seller have differing opinions on the business's future prospects or when the business operates in a rapidly changing industry.

Earnouts can be advantageous for sellers who believe their business has substantial growth potential. By tying a portion of the purchase price to future performance, sellers can potentially receive a higher overall valuation if the business exceeds the agreed-upon targets. However, earnouts can also introduce risks and complexities, as they rely on post-transaction performance, and the achievement of targets may be influenced by factors outside the seller's control.

Rolling Equity: Rolling equity, on the other hand, involves founders, entrepreneurs, or existing shareholders reinvesting a portion of their equity ownership into the acquiring company or the new combined entity formed as a result of the transaction. This reinvestment often takes the form of exchanging a portion of the seller's equity for equity in the acquiring company or its holding entity. Rolling equity aligns the interests of the sellers and the buyer, as the sellers become shareholders in the acquiring company and participate in its future success.

By rolling equity, founders and entrepreneurs have the opportunity to continue benefiting from the growth and value creation of the business they helped build. It demonstrates their confidence in the potential of the combined entity and their commitment to its long-term success. Rolling equity can provide ongoing financial upside, allowing sellers to enjoy further gains as the business continues to thrive under new ownership.

In summary, while both earnouts and rolling equity involve financial arrangements during M&A transactions, they serve different purposes. Earnouts link a portion of the purchase price to the future performance of the acquired business, while rolling equity involves sellers reinvesting their equity ownership into the acquiring company or the new combined entity. Understanding these distinctions is crucial for founders, entrepreneurs, and business owners seeking to maximize their returns and navigate the complexities of M&A transactions.

How is rollover equity calculated?

Rollover equity is typically calculated based on the value of the founder's or owner's equity stake in the existing business. The process involves determining the size of their ownership interest and then rolling that value into the new entity or combined business. The specific calculation can vary depending on the terms negotiated between the parties involved. Here are a few common methods used to calculate rollover equity:

  1. Equity Percentage:

    The founder or owner agrees to transfer a certain percentage of their equity ownership in the existing business to the new entity. The percentage is typically based on negotiations between the parties and can be influenced by factors such as the projected value of the combined business, the founder's contribution to its success, and the overall terms of the deal.

  2. Enterprise Value:

    Rollover equity can also be calculated based on the enterprise value of the existing business. Enterprise value takes into account not only the equity value but also the company's debt, cash, and other financial factors. The founder or owner may agree to roll over a portion of the enterprise value into the new entity, which is typically determined through negotiations and valuation assessments.

  3. Valuation Multiple:

    In some cases, rollover equity may be determined by applying a valuation multiple to the existing business's financial metrics, such as revenue or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This approach involves using industry-specific or market-based multiples to arrive at a fair value for the rollover equity.

It's important to note that the specific calculations and methodologies can vary significantly based on the unique circumstances of each deal and the negotiations between the parties involved. Professional advice from legal and financial experts experienced in mergers and acquisitions is highly recommended to ensure accurate and fair calculations during the rollover equity process.

How Much Equity Should I Roll Into The Purchasing Entity?

The amount of equity that a founder should roll when selling their company is a personal decision, and will be unique to every business, founder, and exit process. If you are unsure about how much equity to sell, it is always a good idea to consult with an M&A Advisor and Certified Financial Planner.

With that in mind, Adam Coffey, author of the Amazon Best Seller The Private Equity Playbook, gave his advice to founders considering selling to Private Equity in a recent article in Forbes:

  1. The Rule Of 30:

    Adam created the "Rule of 130" as a guideline for determining when individuals should consider selling their business - the rule suggests that if the sum of their age and the percentage of their net worth tied up in the business exceeds 130, it may be an appropriate time to start contemplating an exit strategy.

  2. Understand Your Options:

    The Rule of 130 was created to give us a sense of when it is time to reduce our personal financial risk and consider selling our businesses - however, this doesn't mean that a founder is required to sell 100% of the company. It is important to understanding that there are options and flexibility in the type of buyer (financial, strategic, or sponsored-backed), and in the amount of equity a business owner can cash out vs roll into the future platform or entity.

  3. Consider The Economic Cycle:

    A business owner should always consider what’s going on around them economically, within their industry of focus, and understand the risk factors inherent in owning a company. Being aware of these factors, and weighing your age, health, your need for liquidity and the risks to your business, can help determine your best course of action with regards to selling your company.

  4. Stack The Deck In Your Favor:

    To make informed decisions regarding the optimal timing to sell your business, it is recommended to consult with a certified financial planner, engage in discussions with peer groups or a CEO coach, and seek advice from multiple parties due to the financial, legal, and tax considerations involved, ultimately enabling you to shape a favorable outcome for both yourself and your business.

Do you pay taxes on rollover equity?

The tax implications of rolled equity can vary depending on the jurisdiction and specific circumstances involved. Generally, rolling over equity itself does not trigger an immediate tax liability. Instead, the tax consequences are typically deferred until a triggering event occurs, such as the eventual sale or disposition of the rolled-over equity.

Todd Sullivan.
Todd Sullivan

Todd graduated from Yale University where he was a 2-time MVP of Yale’s ice hockey team. After a year as a minor league hockey player in the San Jose Sharks and Toronto Maple Leafs organizations, Todd returned to school for his MBA at the University of Michigan where he graduated as Entrepreneur of the Year. Todd went on to build and sell four companies over the next 25 years with offices in Boston, San Francisco, Chicago, New York and Detroit. After the sale of his last business in 2015, Todd has dedicated his time to educating his fellow founders about the M&A process and helping many of them maximize the sale of their businesses.

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