Equity Rollover

In an equity rollover the seller reinvests part of the sale proceeds directly into the acquiring entity and stays on as a minority shareholder. The reference point of the rollover quota matters, because 20 percent of proceeds is not the same as 20 percent of post-closing ownership. Beyond the size, the key negotiation is whether the rolled equity ranks pari passu with the sponsor or behind its preferred capital.

The valuation at which the reinvestment is made matters just as much, since a rollover at the full transaction price treats the seller like a new investor, while entry at a lower value may provide an additional economic benefit whose tax treatment needs separate assessment. Tax treatment is significant for the seller generally: an appropriately structured contribution of existing shares may allow tax deferral. Simply reinvesting cash sale proceeds does not automatically produce that result, materially affecting the amount available for reinvestment. The attraction for the seller is a second payout at the eventual exit. The price is a continued illiquid and concentrated position, additionally subject to the shareholders' agreement with its drag-along rights and transfer restrictions.

The structure is especially common with management, where it is also called a management rollover and is regularly combined with vesting and leaver provisions. Assessment across several exit scenarios is indispensable, because the ranking of the sponsor's capital determines from what sale price the rolled shares have any value at all. Where they rank junior, a mid-range exit can leave the seller with nothing from the rollover. Information rights and tag-along rights also need settling, since as a minority shareholder the seller otherwise has no influence over the timing and terms of the next sale.

Note: This explanation is for general information only and does not constitute tax advice. Tax treatment depends on the individual case and may change with new legislation. For a binding assessment, please consult a qualified tax adviser.