How does a private equity rollover work for a business seller?

By Michael D. Rubin, CEO & Founder · September 2026 · 811 words

In a rollover, you sell your company to a private equity group but reinvest part of your proceeds into the buyer’s new holding company, so you take most of the price in cash at closing and keep a stake that pays out when the group sells the business later. That later payout is often called the second bite of the apple.

The second bite can be worth more than the first, or very little. It depends on how the company performs, how much debt sits ahead of you and the terms attached to your shares.

How a rollover works, step by step

• The group sets up a holding company, a new entity that will own your business.
• Both sides agree on enterprise value, the value of the whole business before debt is paid off and cash is counted.
• The purchase is funded with the group’s equity, bank debt and your rolled equity.
• You receive cash for most of your ownership and exchange the rest for shares in the holding company.
• The company keeps operating, often with you or your management team running it and the group setting strategy.
• The group sells the company later, after several years of growth, often to a larger private equity group or a company in your industry. You are paid for your shares from those proceeds.

An illustration with round numbers

Suppose a group buys your company for $20 million. It borrows $10 million, puts in $7 million of its own equity, and you roll $3 million. You receive $17 million before debt payoff, fees, taxes and adjustments, and you own 30% of the holding company’s equity. These figures are hypothetical and show only how the mechanics work.

What the illustration shows

Because debt comes first, your stake moves faster than the company’s value in both directions. In the strong case, the company grew by half and your $3 million more than doubled. In the weak case, the company lost less than a third of its value but your stake lost half. The illustration also assumes you hold the same class of shares as the group, which is not always true.

Terms that decide what your rolled equity is worth

• Same price, same class. Your shares should be valued at the price the group paid and should share proceeds equally with the group’s shares. If the group holds preferred shares, which are paid back first and sometimes with a guaranteed return, your common shares sit behind them.
• Management incentive pool. Groups often set aside equity for managers, which dilutes everyone. Ask how large it is and whether it comes out of your share.
• Fees charged to the company. Some groups charge the company management or transaction fees, which reduce the value available to all owners.
• Future capital. If the company needs more money, can you invest to keep your percentage, or will you be diluted?
• Your rights as a minority owner. Tag-along rights, information rights and a fair exit formula if your role ends all protect the stake.

Why taxes need careful structuring

A properly structured rollover can let you defer tax on the portion you reinvest until those shares are later sold. A poorly structured one can mean owing tax on value you never received in cash. The structure depends on your entity type and the buyer’s setup, and only your CPA and transaction attorney should decide it.

Questions to answer before you agree to roll

• Would the cash at closing, on its own, meet my financial goals?
• Have I spoken with owners who rolled equity with this group, including in companies it has already sold?
• Do I want to keep working under the group’s direction, and what happens to my shares if I stop?
• What does the group expect the company to earn in order to repay its debt, and what if results fall short?
• Could I live with my rolled equity being worth much less than it is today?

How MDR & Associates handles private equity offers

Private equity groups are part of the database we go to first, and in 2023 the firm was named in the Axial Advisor 100 among the lower middle market advisors most referred by the buy side; more on the firm is on our about page. When a group proposes a rollover, we compare it with all-cash offers on realistic outcomes, as in how to compare offers when selling your business, and review each one with you in person. We represent owners in manufacturing, home services, distribution and business services.

If private equity interest has reached you, talk with us confidentially before you respond.

Where this fitsHow a business sale works, step by step →