The buyer is insisting we roll over twenty percent of our equity into their holding company, but we suspect their current valuation is inflated by financial engineering. How do we diligence the buyer's capital structure and equity value to ensure our rollover shares represent actual wealth rather than highly diluted paper?

Question

Tyler Smith · Accepted Answer

Rollover equity is often promoted as a second bite of the apple, but without deep diligence, it can easily turn into zero-value paper. To protect your wealth, you must diligence the buyer's holding company with the same rigor they use on your business. Start by requesting a complete capitalization table that shows all classes of stock, options, warrants, and their respective liquidation preferences. You need to know exactly where your rollover shares sit in the waterfall. If the buyer has layered senior preferred equity with high compounding dividends ahead of your common shares, your equity could be completely wiped out during a future sale. Next, analyze their leverage ratios. High debt levels at the holding company level mean that free cash flow will be diverted to debt service rather than growth or dividends. Use your dedicated Thinking Time to model various exit scenarios for the buyer's platform. If their valuation is indeed inflated, calculate what the business must sell for in the future just for your rollover equity to break even. Insist on tag-along rights, drag-along protections, and a put option that allows you to sell your shares back to the company at a fair market value after a set period. By treating rollover equity as an investment decision rather than a mandatory deal term, you ensure your rollover is a genuine wealth-building opportunity.