The private equity buyer wants us to roll over fifteen percent of our equity into their new platform holding company. How do we analyze their capitalization table and debt leverage to make sure our rolled equity actually has a path to a second exit?

Question

Tyler Smith · Accepted Answer

Rolling over equity can be highly lucrative, but it is also incredibly risky if you do not understand the buyer's capital structure. You are essentially converting a portion of your guaranteed cash at closing into a minority investment in a business you no longer control.

First, examine the debt leverage the private equity firm is placing on the platform. High debt-to-EBITDA ratios can starve the company of the cash needed for growth and increase the risk of default, which would wipe out your equity entirely.

Second, analyze the liquidation preferences and class of equity you are receiving. If the private equity sponsor holds preferred equity with high compounding dividends while you hold common equity, they will get paid first at the next exit, potentially leaving nothing for your common shares.

We recommend insisting on pari passu terms, meaning your rolled equity is the exact same class and shares the exact same rights as the private equity sponsor's equity. Ensure you have clear tag-along rights and registration rights so you can participate fully in the next liquidity event without being squeezed out.