The Value of the Roll: Equity Rollovers in Business Sales

Selling a business is a challenging decision. Often, the seller is so committed to their business that they would like to continue to benefit from growth after the sale. There is a solution: an equity rollover.

An equity rollover occurs when a business owner sells their company but reinvests a portion of the sale proceeds into the new entity. Typically, an equity rollover involves the seller:

• Receiving cash, debt, and equity in the newly formed entity.
• Reinvesting part of the sale proceeds back into the company.
• Maintaining a minority ownership stake.

For example, if an owner sells their business for $15 million, they might choose to reinvest $3 million into the new entity. This would provide the owner with a 20% equity stake. The former owner remains in the game and is committed to the company’s success.

Equity rollovers have several advantages:

• Both seller and buyer are incentivized to see the business succeed.
• The seller has the potential to benefit from future gains. If the company performs well, the value of the retained equity can increase significantly.
• Equity rollovers can offer tax advantages, such as deferring capital gains taxes on the rolled-over portion until the new equity is sold.
• The buyer can have greater confidence in the transaction. By retaining a stake in the business, the seller signals their belief in its future success.
• Retaining equity maintains the seller’s involvement and, therefore, their ability to influence key decisions and strategies.

There are also several downsides of an equity rollover for the seller:

• They receive less cash upfront.
• The future value of the retained equity is subject to the business’s performance, exposing the seller to ongoing business and market risks.
• Differing visions of business management between seller and buyer can lead to conflicts.
• The legal and financial structures of equity rollovers are complex and can increase transaction costs and timelines.

When considering an equity rollover, a seller should pay detailed attention to negotiating the terms of their continued involvement in the business. Options for this involvement include:

• Taking a seat on the board to provide a formal role in overseeing the company’s direction.
• Having an advisory role, which enables the provision of strategic input without being involved in day-to-day operations.
• Remaining part of the executive management team, thus being directly involved in decision-making.

An equity rollover offers a strategic option for business owners looking to sell their company while retaining a stake in its future. This approach can align interests between sellers and buyers and provide potential tax benefits and potential financial gains. However, it comes with risks, including potential conflicts with new owners. This can be a very good option, but sellers should first evaluate their financial needs and desire for future involvement before making any decision and then carefully negotiate the specific terms that align with their long-term goals.

Caroline McInerney