The private equity buyer wants us to roll over fifteen percent of our equity into their platform, but they are valuing their platform at a massive double-digit multiple while buying us at a single-digit multiple. How do we negotiate a fair valuation parity for our rollover equity?

Question

Tyler Smith · Accepted Answer

This valuation arbitrage is a common trap private equity buyers use to minimize their actual cash outlay while inflating their own equity value. If they buy your business at a six-times multiple but value their rollover vehicle at a twelve-times multiple, your rolled equity is immediately worth half of what you think it is. You must fight for valuation parity.

Your first line of defense is to demand a detailed valuation of the rollover vehicle. Do not accept their internal estimates. Ask for their latest third-party audits, debt schedules, and historical performance metrics. If they cannot or will not provide this, you should refuse to roll over your equity under those terms.

Negotiate for a structured adjustment to ensure your equity is rolled on a dollar-for-dollar basis. This means your rollover equity must be valued at the same multiple as the overall transaction, or you must receive preferred shares with a liquidation preference and a compounding dividend. This protects your capital ahead of the common shareholders if the platform underperforms.

Use your EOS® V/TO® to demonstrate the high value your business brings to their platform. If your operational efficiency and leadership structure will help them scale their other portfolio companies, you have the leverage to demand better terms. If they refuse to grant parity or preferred terms, reduce your rollover percentage to the absolute minimum and demand more cash at closing.