A larger roll-up platform is offering us a standard industry multiple, but we know they will immediately package our EBITDA into their own much higher trading multiple. How do we negotiate a rollover equity structure that ensures we capture our fair share of this multiple arbitrage at their ultimate exit?

Question

Tyler Smith · Accepted Answer

When a larger private equity backed platform buys you, they are performing multiple arbitrage. They buy your EBITDA at a six-times multiple and instantly value it at the twelve-times multiple of their larger platform.

To capture your share of this massive value creation, you must negotiate a rollover equity structure. Instead of taking one hundred percent cash at close, roll fifteen to twenty percent of your transaction value into the buyer's parent-level equity.

To protect this investment, negotiate specific rights within the equity agreement. Ensure your rolled equity is pari passu, meaning on equal footing, with the sponsor's equity, rather than being subordinated to complex liquidation preferences.

Additionally, secure drag-along and tag-along rights, ensuring that when the platform sells to a larger buyer, you are guaranteed the right to sell your equity on the exact same terms as the private equity sponsor.

By keeping some skin in the game through a properly structured rollover, you align your interests with the sponsor and participate in the second bite of the apple, converting your initial six-times EBITDA contribution into a twelve-times payout at the ultimate exit.