The private equity buyer is proposing an equity rollover where we must reinvest twenty percent of our transaction proceeds into their new holding company. How do we evaluate this rollover equity and structure the governance terms to ensure we are not holding worthless paper?

Question

Tyler Smith · Accepted Answer

An equity rollover can be a lucrative second bite of the apple, but it also carries significant risk if you do not have visibility or control over the new holding company's operations. To protect your rollover equity, you must perform rigorous reverse due diligence on the private equity sponsor. Evaluate their historical track record of exits, their leverage levels, and their capital structure to ensure your equity is not junior to massive liquidation preferences. In your negotiations, secure key governance rights such as board representation, information rights, and co-sale rights. These terms ensure you are not squeezed out or diluted by subsequent capital calls. Use your EOS® mindset to evaluate their operational team. Does the parent company have a clear vision and a structured execution model similar to your V/TO®, or are they running on chaotic instinct? If the buyer lacks operational discipline, your rollover equity is at risk. By demanding clean governance terms and verifying their operational structure, you protect the value of your retained equity and ensure your rollover is a genuine wealth-creation vehicle.