A private equity buyer is offering a high valuation but wants us to roll over twenty percent of our equity into their new platform. How do we conduct due diligence on the buyer to ensure this rolled equity is actually worth something?

Question

Tyler Smith · Accepted Answer

Rolling over equity means you are reinvesting a portion of your sale proceeds into the buyer's business. You are essentially partnering with them for a second payout, often called the second bite of the apple. Because of this, you must transition from being the target of due diligence to performing due diligence on the buyer.

Start by examining the buyer's track record. Ask for historical data on their previous investments. How many companies have they successfully exited? Did the rollover investors in those deals actually achieve their projected returns, or was their equity diluted to zero?

Next, evaluate their leadership team and operational philosophy. Do they have a clear strategic plan, or do they rely on financial engineering? If they run their platform company using a structured operating system like EOS®, it is a strong positive signal. It means they value alignment, discipline, and accountability, which increases the likelihood of a successful second exit.

Finally, review the legal rights attached to your rolled equity. Understand your position in the capital stack. Are your shares subordinated to the private equity firm's preferred returns and debt? Do you have veto rights on major corporate decisions? Work with an experienced transaction attorney to ensure your rollover equity is protected against unfair dilution and that your interests are fully aligned with the buyer's.