A private equity firm doing a platform build-out is offering us a six-times multiple because of our size, but we know they are trading at twelve times. How do we negotiate a joint-venture roll-up or equity rollover that lets us capture their multiple arbitrage?

Question

Tyler Smith · Accepted Answer

When a financial sponsor buys your business to add to their larger platform, they are engaging in multiple arbitrage. They buy you at a lower multiple and instantly value your revenue at their higher platform multiple. While you cannot force them to pay their full platform multiple upfront, you can negotiate an equity rollover to capture a share of that arbitrage.

An equity rollover allows you to reinvest a portion of your sale proceeds, typically ten to thirty percent, into the parent entity of the buying platform. This aligns your incentives with theirs. When the platform eventually exits in three to five years, your rolled-over equity is paid out at the higher platform multiple, often yielding a much larger return than your initial cash-out.

To make this work safely, you must conduct thorough due diligence on the platform's capital structure. Ensure that your rolled-over equity is in the same class of stock as the sponsor's equity, or that you have adequate liquidation preferences so you are not diluted or shut out during a recapitalization.

You should also ensure that the platform has a clear, operational growth plan. If they run their portfolio companies on EOS, you will have more confidence that they can scale efficiently. Negotiate for a seat on their advisory board or regular reporting rights so you can monitor your investment. This turns a simple sale into a high-yield partnership.