A private equity firm is using heavy leverage to buy our company and wants us to roll over fifteen percent of our equity. How do we evaluate this highly leveraged deal structure to protect our rollover investment?

Question

Tyler Smith · Accepted Answer

Rolling over equity into a highly leveraged entity is a massive gamble. The private equity buyer is using your cash and senior debt to fund the purchase, which means your rolled equity sits behind a wall of senior debt. If the business underperforms, the bank gets paid first, and your fifteen percent rollover can be wiped out.

To protect your rollover investment, you must scrutinize the capital structure and negotiate strict operational and governance protections. You cannot afford to let the buyer make reckless operational decisions that jeopardize your remaining stake.

We recommend negotiating the following terms:
- Require the buyer to maintain the existing EOS® framework and the Accountability Chart to ensure operational stability post-close.
- Negotiate tag-along rights and drag-along rights to ensure you can exit on the same terms and at the same time as the private equity sponsor.
- Secure veto rights over major operational decisions, such as taking on additional debt, changing the core business model, or replacing key leadership team members who GWC™ their roles.

Make sure you understand the exact debt-to-equity ratio of the new entity. If the leverage is too high, negotiate for a higher cash component at close or demand preferred equity status for your rollover, which guarantees you get paid before the common equity holders.