A strategic buyer is offering a high enterprise value but demands a roll-over equity structure where we hold ten percent of the combined entity. How do we evaluate the true value and risk of this roll-over equity compared to a clean, lower cash-at-close offer from a financial sponsor?

Question

Tyler Smith · Accepted Answer

When evaluating competing offers, you will often face a choice between a financial sponsor offering a platform play and a strategic buyer offering roll-over equity. A strategic buyer may offer a higher overall valuation, but they might require you to roll over ten to twenty percent of your proceeds into the equity of the combined entity. This can be highly lucrative, but it comes with significant operational risks. Before accepting roll-over equity, you must evaluate the governance and operational structure of the post-close entity. If the strategic buyer plans to dismantle your leadership team and absorb your operations into their legacy systems, you lose control over the value of your rolled equity. If they manage the combined entity poorly, your roll-over equity could end up worthless. Conversely, a financial sponsor may offer a slightly lower initial valuation but allow you to retain significant operational control as a platform company. If you run your business on EOS®, you can use your V/TO® and established Accountability Chart to show the sponsor how you plan to scale, giving you a clear path to a second payout. Evaluate roll-over equity based on your trust in the post-close leadership team and your level of operational control. If you cannot protect your decision-making rights, favor the structure that maximizes cash at close.