rollover equity in M&A: a two-company case study across 2023–24

Trust me, rollover equity is a practical tool in PE-backed M&A that keeps founders and management engaged after close while aligning incentives with the buyer’s growth plan.

Rollover equity overview and practical structure

Rollover equity lets sellers convert part of their sale proceeds into an ownership stake in the acquiring company. In practice, you’ll see a cash-plus-equity structure, often with a 60/40 split, though the split varies by deal. Typical rollover ranges from 10% to 40% of the purchase price. Think about a $45 million sale: $40.5 million in cash and $4.5 million rolled over, i.e., 10% of the total price. The idea is simple: sellers stay involved, sometimes with advisory roles or non-controlling board seats, to protect their interests and preserve value creation.

Tax deferral is a core driver. The rolled-over portion can qualify for deferral under IRS rules, stock-for-stock rollovers may fall under Section 351 (tax-deferral rule for stock-for-stock corporate rollovers (no tax at transfer)) for corporations, or Section 721 for partnerships/LLCs, so capital gains on that portion aren’t taxed until a future liquidity event.

In a typical PE-backed deal, that deferral lets sellers redeploy capital into growth opportunities rather than pay taxes upfront. In the example from the notes, the $4.5 million rolled over sees tax deferral on that amount, with taxes deferred until exit on the overall gains, often a profitable setup if the buyer sustains growth.

From the buyer’s perspective and seller incentives

From the buyer’s perspective, rollover equity secures continuity. Sellers bring domain knowledge, customer relationships, and operational insight, which can shorten integration timelines and stabilize post-close performance. For sellers, the upside is the potential to participate in upside beyond the cash payout, especially when the business has strong growth trajectories. In practice, the incentive alignment matters: a seller who stays involved may help drive revenue, margins, and strategic initiatives, which in turn boosts the value of their equity stake.

Rollover structures do carry dilution risk. If the company raises new capital down the line, the seller’s percentage can shrink, even if the dollar value increases. But this is a trade-off for a larger total enterprise value and liquidity at exit.

Real-world case and deal dynamics

In the notes, a Denver-based industrial products manufacturer achieved a 3.2x return on rolled equity over four years, moving $4.5 million into $14.4 million, proof that, when growth compounds, rollover investors can see meaningful appreciation. The same case shows the seller liquidated their rolled equity for $14.4 million after four years, illustrating real-world outcomes.

Deal dynamics in 2025 show less volume but higher value across regions. M&A volumes globally declined about 9% in the first half of 2025 versus the same period in 2024, yet deal values rose roughly 15%. That environment supports more earnouts and equity-linked structures as buyers and sellers seek mechanisms to bridge valuation gaps and share upside. In North America and Europe, rollover templates have matured: standard stock exchanges, LLC unit rollovers, and earnout-linked structures are common, with variations by entity type (C-corp, S-corp, LLC) and tax strategy.

Practical case study and tax mechanics

A practical case study approach helps. In the example from the notes, the Dallas-based or Denver-based “industrial product manufacturing company” sold to an unnamed private equity firm. The purchase price was $45 million; cash was $40.5 million (90%), rollover equity was $4.5 million (10%). The rolled equity produced a 3.2x multiple, reaching $14.4 million after four years. The seller maintained a non-controlling advisory role on the board.

For tax, the $4.5 million rollover benefited from deferral under Section 351/721 until exit. Despite dilution risk from future rounds, the total value increased, matching the buyer’s growth expectations and the seller’s liquidity needs.

Real-world data points matter here. The 2025 M&A environment shows increased attention to earnouts and equity-linked structures as a response to market uncertainty, and major firms like PwC and Deloitte track this trend. The broader takeaway is this: rollover equity is a known, tested way to balance risk and reward for both sides, particularly in middle-market deals where founders or management teams want to stay involved but need liquidity.

How to structure effectively

The five major templates cover various entity types (C-corp, S-corp, LLC, earnout-linked, and management incentive). Expect a typical cash-to-rollover split around 60/40, though deals vary. Prepare for dilution risk if you anticipate new capital raises. Ensure a governance plan is clear: seller-advisor roles, potential board seats, and decision rights should be defined to maintain alignment without conflicts.

Notable takeaways

• Rollover equity commonly ranges 10-40% of the purchase price.
• A 60/40 cash-to-rollover split is a common starting point, but deal terms vary.
• Tax deferral benefits hinge on IRS rules (Section 351 for corporaet rollovers, Section 721 for partnerships/LLCs).
• Rollover can deliver meaningful upside, as shown by the 3.2x return in the Denver case.
• Global M&A activity in 2025 shows value growth despite volume declines, supporting more flexible deal structures.

Practical notes for practitioners

When you model a rollover, stress-test multiple exit scenarios, including timing and capital-raising needs that could cause dilution. Build in a governance plan that protects both sides: seller advisory roles, board observer rights, or non-controlling seats can preserve influence without creating friction. Document tax mechanics early with counsel, verify eligibility for Section 351/721, and align the rollover with the buyer’s capital plan and growth thesis.

For continued clarity on terms and templates, read the full materials from Linden Law Partners, Clearly Acquired, and PwC/Deloitte trend reports. If you want deeper analysis on how to maximize personal wealth through rollover equity, review the DealRoom and Valuation Research Corp. insights. This topic will stay relevant as market conditions push buyers toward equity-linked structures and earnouts.

Practical notes and call to action: Dive deeper into rollover equity terms and templates in our Matactic glossary, and sign up for our free M&A course to sharpen your ability to structure, model, and negotiate rollover deals. Peace out.