Rolled Equity. Why it is Not Deferred Purchase Price

Introduction: What Is Rolled Equity? Rolled equity refers to the reinvestment of sale proceeds into the new ownership structure alongside a buyer. Instead of receiving all cash at close, the seller retains a stake in the business, aligning interests with the new owner and participating in future upside.

Let’s look at an example with our friends at McSample Industrial Services to understand how rolled equity can create an increase in value.

100% Sale - The Baseline Scenario

Let’s assume a business generates $2.500 million in EBITDA and is sold at a 5.0x multiple. This results in a $12.500 million Enterprise Value. In a 100% sale, the seller receives the entire $12.500 million in cash at Close. While that provides immediate liquidity, the seller gives up any future upside potential of the Company.

Note: Almost all transactions are net of cash and debt; meaning that $12.500 million is offered for the company’s ownership and the owners keep the cash on the books but are responsible for paying off all the outstanding debts (i.e. term loans, capital leases, truck loans, and other debt like instruments).

Exhibit I – McSample Industrial Services Value

70% Sale and 30% Rolled Equity - Rolled Equity Scenario

Consider a different path. The seller agrees to a transaction at a $12.500 million valuation and chooses to roll $1.500 million into the new entity, resulting in 30% ownership. The $11.000 million in cash at close accounts for the $1.500 million reinvested by the seller. The deal is structured as follows:

• $7.500 million in Debt

• $5.000 million in Equity

  • Buyer brings $3.500 million (70% ownership) cash to the table

  • Seller Rolls $1.500 million (30% ownership)

The seller receives $11.000 million in cash at close (88% of $12.500 million) and retains a $1.500 million stake in the new business worth 30% of the Company’s equity.

Exhibit II – McSample Industrial Services 70% Sale Mechanics

Note: the far-right column illustrates the new capital structure: $7.500 million of debt, $5.000 million of equity, of which $1.500 of the equity is retained by the Seller.

Three Levers of Valuation Creation

Over the next few years, the management team pulls all three value creation levers:

• EBITDA Growth. EBITDA grows from $2.500 million to $3.000 million as the Company implements a strategic plan, including annual goals, budgeting, and data-driven decision-making

• Multiple Expansion. The EBITDA multiple expands to 6.0x, supported by increased scale and detailed tracking of metrics such as customer segments, win rates, backlog, and project-level data, reducing perceived risk for the valuation firm (see below)

• Debt Paydown. Debt is reduced from $7.500 million to $3.750 million under a straight-line 10-year amortization schedule

Note on Multiple Expansion. The EBITDA multiple doesn't really expand. Think about this like a house. A house has an inherent value based on the community, neighborhood, schools, size, condition, and specific factors such as yard size, a deck/pool, master bedroom location, number of bedrooms, etc. That value can be compared to other homes using a price per square foot metric to sanity check how the market thinks about value of a home. The house doesn't really derive its value from the price per square foot. Similarly, by derisking the business, the inherent value of the company increases. The EBITDA multiple is an implied metric to allow for comparison.

Exhibit III – McSample Industrial Services Equity Value

Note: the blue bar represents debt on the Company’s balance sheet, and green represents the equity as calculated (enterprise value less debt equals equity value).

The New Equity Value 

As mentioned above, the new EBITDA for McSample Industrial Services is $3.000 million and the implied EBITDA multiple is 6.00x. Those equate to an enterprise value of $18.000 million. To determine the equity value, we remove the $3.750 million of remaining debt to get to $14.250 million of equity.

Recall, the Seller rolled $1.500 million, which was 30% of the total equity. The seller’s $1.500 million investment becomes $4.275 million, as they own 30% of the $14.250 million equity value. This equity growth delivers an increase to the overall value received by the McSample Industrial Services owners by $2.775 million as shown in the exhibit below.

Exhibit IV – McSample Industrial Services Comparisons

Note: the Seller receives $11.000 million in a “first bite of the apple” and at the second recapitalization, the Seller receives $4.275 million in a “second bite of the apple.” All in, the Seller has received $15.275 million, which is $2.775 million or 22.2% more than the $12.500 million offered in a 100% sale to a competitor.

Why It Works:

The Power of Leverage and Growth. The rolled equity structure creates a powerful wealth-creation engine. By leveraging modest growth, multiple expansion, and debt paydown, the equity value can grow significantly. Sellers get a "second bite at the apple" while taking substantial cash and risk off the table.

Risks and Considerations. Rolling equity isn't risk-free. The future value depends on continued company performance, market conditions, and alignment with the new majority owner. The seller may also have limited control or governance rights post-transaction, depending on the operating agreement. However, with a strong partner and solid strategy, the upside potential can more than justify the risk.

Final Thoughts:

Rolled equity is ideal for owners who believe in their business’s future, want to de-risk now, while staying involved in future value creation. For the right seller, rolled equity can turn a successful exit into a life-changing wealth event—twice.