The buyer is requiring us to roll over fifteen percent of our equity into their new platform, but they are valuing their platform at a massive multiple. How do we conduct due diligence on their valuation to ensure our rollover is not immediately diluted?

Question

Tyler Smith · Accepted Answer

When a private equity buyer requires you to roll over equity into their platform, you are essentially investing in their business. If they value your company at a conservative six times EBITDA but value their platform at an inflated twelve times EBITDA for the rollover calculation, your equity is being diluted on day one. You must conduct rigorous due diligence on their platform valuation before agreeing to the deal.

Demand the same level of financial transparency from the buyer that they expect from you. Under the IVS 105 Market and Income approaches, ask for their historical financial statements, their Quality of Earnings reports, and the quantitative models used to justify their platform's valuation. Run a regression-based valuation on their platform using public market comps to verify if their stated multiple is supported by actual market data.

Analyze their capitalization table to understand where your rollover equity sits in the capital structure. Ensure that your rolled-over shares have the same class, voting rights, and liquidation preferences as the sponsor's equity. Beware of participating preferred shares or high-interest debt instruments that sit ahead of your equity, which can drain all the value before you can participate in a second exit.

Work with your leadership team to evaluate the conative alignment and GWC™ of the platform's operating executives. If their leadership team lacks the execution capability to scale the platform, your rollover is at risk. By demanding full financial disclosures and treating the rollover as a strategic investment, you protect your hard-earned wealth.