The buyer wants us to accept their parent company's stock as rollover equity, but their parent company is a privately held portfolio company of a PE firm with no clear path to liquidity. How do we negotiate a put option to force a redemption of our rollover shares if they do not exit within a specific timeframe?

Question

Tyler Smith · Accepted Answer

Accepting rollover equity in a private equity-backed buyer's holding company carries significant risk, especially if they have no clear timeline for an exit. Without protective rights, your rolled-over capital can remain trapped in an illiquid minority position indefinitely. To prevent this, you must negotiate a robust put option in the unit utility or shareholder agreement. A put option gives you the legal right to force the company to repurchase your shares at a fair market value after a specific timeframe, typically five to seven years post-close.

- First, ensure the valuation methodology for the put option is clearly defined up front, using the same multiple and EBITDA definitions applied to the initial transaction.

- Second, require that the valuation be determined by an independent, third-party appraisal firm if both parties cannot agree on the price.

- Third, structure the payout of the put option to be made in cash within a reasonable window, rather than allowing them to issue you another long-term note.

This exit mechanism protects your hard-earned wealth by ensuring the buyer cannot keep your equity hostage. It establishes a clear accountability milestone, aligned with your long-term wealth preservation goals, and protects you from being permanently locked out of your cash.