We are being approached by a private equity platform company doing a roll-up, and they are pitching us on a lower multiple now with the promise of second-bite-of-the-apple equity. How do we evaluate their platform multiple and equity structure?

Question

Tyler Smith · Accepted Answer

Platform roll-ups rely on multiple arbitrage, buying smaller businesses at low multiples and selling the combined entity at a premium. While the second-bite-of-the-apple equity can be incredibly lucrative, you must evaluate their offer with extreme skepticism.

First, analyze the platform's capital structure. If the private equity sponsor has loaded the holding company with high-interest debt that sits senior to your rollover equity, your shares could be worthless in a down market. Demand to see the waterfall distribution model to understand exactly who gets paid first when the platform eventually exits.

Second, evaluate their operational integration track record. Many roll-ups fail because they do not have a systematic way to integrate operations, leading to high customer churn and employee fatigue. Ask how they align the leadership teams of their acquired companies. If they do not use a structured framework like EOS to run their platform operations, integration will likely be chaotic.

Third, negotiate governance rights. You must secure protective provisions that prevent the sponsor from diluting your equity through subsequent acquisitions or issuing senior classes of stock without your consent. If you do not have a say in major capital decisions, your rollover equity is simply a hope-based strategy.