Glossary
Rollover equity
Part of the purchase price taken by the seller as shares in the buyer or its parent company, rather than as cash. The seller "rolls over" some of their value into the combined business.
In plain English
A buyer, particularly an investor backed group, may offer to pay part of the price in shares in the group. The seller becomes a shareholder in the larger business and shares in its future, including any eventual sale of the group. Rollover equity aligns the seller with the buyer's plan and reduces the cash the buyer needs on the day.
It is different from an earnout: an earnout is a future cash payment conditional on performance; rollover equity is an ownership stake whose value depends on what the whole group is eventually worth.
Why it matters
Rollover equity can be very rewarding if the group grows and is sold at a higher value. It can also be worth much less than the headline if the group underperforms, and it is usually illiquid until the group is sold. The seller is taking a view on the buyer's strategy, management and funding, which deserves the same scrutiny the buyer applies to the seller's business.
What to watch for
- Understand the class of shares, the rights attached and how they rank against the investor's own shares.
- Ask how and when the shares can be sold, and what happens if the seller leaves the business.
- Consider the group's debt and the investor's preferred return, which are paid before ordinary shareholders on a sale.
- Tax treatment of rollover can differ from cash and varies by jurisdiction. Advice is essential.
Transaction language and legal treatment depend on the agreement and the jurisdiction. Written by Motion Advisory Partners as general guidance, not legal advice.