M&A Deal Points | Rollover Valuation 1

In today’s emerging middle market, rollover equity is becoming increasingly common. In fact, more than one in three transactions now involve some form of equity rollover, according to the latest market study by the Alliance of M&A Advisors.

As rollover structures become more prevalent, it’s important for sellers, especially owner-operators, to understand how rolled equity is valued. It’s not as simple as taking a percentage of the headline sale price.

Let’s break it down.

The Rollover Equity Trap: Don’t Confuse Enterprise Value with Equity Value

Suppose your business is being acquired for $50 million on a cash-free, debt-free basis, and you’ve agreed to roll 10% equity into the new entity.

It’s easy to assume that 10% of $50 million means you’re rolling $5 million.

But here’s the catch: That $50 million represents the enterprise value (EV) the total value of the business, including both equity and debt.

Rollover equity, however, is calculated based on equity value, not enterprise value.

A Quick Example:

Enterprise Value (EV): $50 million

Outstanding Debt: $10 million

Equity Value: $40 million (EV – Debt)

If you’re rolling 10%, you’re actually rolling $4 million, not $5 million, because that 10% is based on the equity value of the company.

This distinction mirrors what happens in an all-cash deal: the company’s debts are paid off first, and only then do the remaining proceeds go to the owners. In a rollover scenario, your retained equity is based on the value that remains after those obligations are cleared.

Why This Matters

Whether you’re negotiating terms, modeling your future ownership, or planning for liquidity, understanding the true value of your rollover equity is critical. Misunderstanding this concept could lead to unrealistic expectations, and missed opportunities to negotiate better terms.

Have questions about how rollover equity works in your deal? Our M&A team is here to help.