Seller Equity Rollover: Enterprise Value or Equity Value %?

March 25, 2025

by a searcher in Montreal, QC, Canada

Assuming you buy a company for $10M with the following structure:

- 70% debt ($7M)
- 20% seller rollover ($2M)
- 10% sponsor equity ($1M)

In this example, what would be the equity ownership of the seller in the company post-close?

Option 1
- The seller will own 67% of the equity post-close ($2M / ($1M + $2m))

- The 20% rollover is only applied to the Equity Value and not the full Enterprise Value

Option 2
- The seller rolled over 20% of the enterprise value and will also own 20% of the equity value while you own 80% post-close

- You will finance only 80% of the enterprise value - making it a lot easier to take on debt (i.e., buying 80% of the business, but using 100% of the EBITDA to repay your debt)

- The seller's 20% equity ownership will be set at a minimum value of $2M in the negotiations, and will likely need a structure where you buy him out in 3-7 years at a fixed price (i.e., he'll have a put option, or you'll have a call)

What's the correct way to model the seller's rollover in a transaction?

Do sellers that rollover a % of the purchase price (EV) end up owning that same % of the equity? Or does that % need to be adjusted to reflect the pro-rate equity ownership once we lever up the company?

Been getting different opinions on this.

Reply by a searcher
from Harvard University in Calgary, AB, Canada

This is a really interesting question. IF you're limited to common equity and not preferred or other mezz options then option 2 gives you a different EV. Sponsor equity is 80% of the post-acquisition company (ie, after debt) and has a book value of $1M (what they paid for it). This implies that the book value of the seller's rolled stake is $250k (80% = $1M => 20% = $250k) since everyone's common shares are worth the same amount. Since EV is the same before and after acquisition, the EV (book value) is $8.25M, not $10M. Of course, you can make any argument you want about market value of equity, but from an accounting (tax) standpoint this is what is implied. Note that option 1 and 2 are the same if no debt is used to acquire (or rather debt is the same before and after acquisition).

Another way to see this is to consider the case where the seller simply takes on the debt themselves. Then they could pay themselves the $7M and be left with a levered company. If they are then willing to sell you 80% of the levered equity for $1M, again that implies an equity value of $1.25M and an EV of $8.25M.

Watch out with language too- in option 2 "the Seller rolled over 20% of the enterprise value" is not a true statement. They actually rolled 3% of the EV ($250k/$8.25M).

This all changes if they're getting some sort of instrument with a face value of $2M. "The seller's 20% equity ownership will be set at a minimum value of $2M in the negotiations" In that case, option 2 would be consistent with an EV of $10M. If seller and sponsor both get preferred equity, then you can set up the common equity split however you want so common could be 80/20 even though the preferred equity split is 33/67.

Taxes, fees, and guarantees all alter the math, but not in significant ways if the values are small.

Reply by an investor
from University of Southampton in Los Angeles, CA, USA

In your example option 1 is the correct answer. The seller owns 67% of the equity, the amount of debt you put on is irrelevant. The confusion is born from how search economics work and "step ups" that are used to provide search investors with greater return profiles given increased risk profile. In sponsor LBO world you don't have step ups

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