M&A 101: Mastering Roll-Over Equity — The Second Bite and Beyond
Hey there, fellow M&A enthusiasts! 👋🏻 If you’ve ever found yourself wondering how to elevate the value of your business during an acquisition, you’re in the right place. Today, we’re diving into the fascinating world of roll-over equity, a creative alternative that can help sellers secure a higher EBITDA multiple and take their ventures to the next level.
🍎 What is Roll-Over Equity?
Let’s start with the basics. Roll-over equity is a transaction structure where the seller retains a portion of their ownership stake in the business being acquired, usually in the form of common or preferred equity. In simpler terms, it’s like holding onto a piece of the pie even after you’ve sold most of it. This retained ownership interest is typically reinvested in the newly merged entity, giving the seller a continued stake in its success.
But here’s where it gets exciting: roll-over equity isn’t just about the initial transaction. It’s a strategic move that positions the seller to take multiple bites of the apple in the years to come. After the first sale, if the buyer decides to sell the business to another private equity firm down the road, the original owner has choices:
- Partial Exit with a Third Bite: Owners have the option to sell a portion of their current stake, allowing them to cash in on the growth and appreciation of their remaining equity. They can then choose to stay on with the new buyer, essentially taking a third bite of the apple.
- Complete Exit with the First Buyer: Alternatively, owners can opt for a complete exit by selling their entire stake alongside the first buyer. This exit strategy provides a clean break and allows them to exit the business with the initial buyer.
🚀 When Does it Make Sense to Take This Structure?
Roll-over equity becomes particularly enticing when a seller aims for a higher valuation than what their business is currently worth in the eyes of the market. Here’s the deal: when your company’s valuation doesn’t align with your expectations, or the market isn’t offering what you believe your business is worth, roll-over equity can be a game-changer.
This structure can make sense in various scenarios:
- Long-term Belief: If you have a strong conviction in the future growth prospects of the combined entity and want to participate in that upside, roll-over equity allows you to bet on your business’s long-term potential.
- Higher Valuation Goals: When you’re confident that the synergy between your business and the acquiring company will result in substantial value creation, roll-over equity lets you capitalize on that potential.
- Risk Mitigation: It can serve as a risk-sharing mechanism, aligning your interests with those of the acquiring company. If you believe that together you can weather industry challenges and generate higher returns, roll-over equity is an appealing option.
🤝🏻 What Does it Involve from the Seller’s Perspective?
From the seller’s viewpoint, roll-over equity involves a few crucial steps:
- Negotiation: Start by negotiating the terms of the deal with the acquiring company. This includes determining the percentage of equity you’ll retain and the conditions under which you can cash out or sell your stake in the future.
- Due Diligence: Conduct thorough due diligence on the acquiring company to ensure that their vision, strategy, and financial health align with your expectations. You want to be sure you’re partnering with a company that can deliver on its promises.
- Post-Acquisition Integration: After the deal is finalized, actively participate in the integration process. Collaborate with the acquiring company’s management team to leverage your expertise and contribute to the success of the merged entity.
In conclusion, roll-over equity can be a powerful tool for sellers who believe their businesses are undervalued by the market or want to secure a higher EBITDA multiple. This innovative structure not only offers the potential for increased valuation but also aligns your interests with those of the acquiring company, fostering a promising future partnership.
So, if you’re looking to take your M&A game to the next level and maximize your business’s worth, consider roll-over equity as a strategic option. It could be the key to unlocking a brighter future for both you and your company, with the flexibility of taking multiple bites of the apple along the way. 🗝
