The private equity buyer wants us to roll over twenty-five percent of our enterprise value into their platform, but we suspect their current platform valuation is artificially inflated. How do we structure the rollover terms to ensure our equity converts on a fair, relative basis?

Question

Tyler Smith · Accepted Answer

Rolling over equity into a private equity platform is often pitched as an exciting second bite of the apple, but if their platform is valued on an inflated multiple while your business is valued on a standard multiple, your rollover shares are diluted before the ink even dries. To avoid this valuation mismatch, you must demand relative valuation parity in the letter of intent. This means that if the buyer is valuing your business at a six-times EBITDA multiple, your rolled equity must buy into their platform at that same equivalent entry multiple, or their platform multiple must be subjected to the same rigorous, independent quality of earnings audit that your business underwent. Do not accept their internal, self-reported valuations. Ensure your definitive agreements include a most-favored-nation clause, guaranteeing that your rollover shares have the exact same economic and liquidation rights as the sponsor's equity. They should not be subordinated to a complex stack of preferred returns or management fees that drain the value before you can exit. Use your dedicated Thinking Time to analyze their capital structure. If the buyer refuses to provide transparency on their platform's real capital stack and valuation metrics, treat it as a critical warning sign and consider taking more cash at close, even if it means accepting a slightly lower headline valuation.