We are negotiating a majority recapitalization with a private equity sponsor where we will roll over twenty percent of our equity, but we are worried their entry valuation is artificially low, which would dilute our second bite of the apple. How do we negotiate the rollover structure to protect our equity?

Question

Tyler Smith · Accepted Answer

When rolling over equity in a private equity transaction, you must ensure you are treated on equal terms with the sponsor. This is known as pari passu. Many buyers try to structure their majority investment with preferred equity or liquidation preferences that pay them back first, which drastically dilutes the value of your common rollover equity. To protect your twenty percent, you must negotiate to roll your equity into the exact same security class that the private equity sponsor is buying. If they use preferred shares with a compounding dividend, your rollover must be in preferred shares with the same terms. Furthermore, you must verify the valuation multiple applied to your rolled equity. If they buy eighty percent of your company at an eight times multiple, your rolled twenty percent must be valued at that same eight times multiple, not a discounted rate. Use your V/TO® to align on the strategic growth plan and ensure your Integrator retains a seat on the board of the new entity. This gives you the visibility needed to protect your investment and secure a true second bite of the apple.