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January 27, 2025
The M&A Detective: Unraveling the Mysteries of a Business
March 4, 2025At Touchstone Advisors, we often see rollover equity as a common component of M&A transactions, especially when the buyer is a private equity (PE) firm. It involves the seller reinvesting a portion of their sale proceeds into the equity of the acquiring entity. The phrase “Second Bite of the Apple” refers to the possibility of a significant financial payout when the company is sold again in the future, potentially at a higher valuation.
By rolling over equity the seller has the opportunity to participate in future growth. The seller retains a stake in the business and has the potential to benefit from future appreciation in the company’s value. If the buyer successfully grows the company, the seller can achieve a substantial return on their reinvested equity. Normally we would only recommend investing in the NewCo if the seller is staying on in some capacity, but we have had situations where that is not the case.
Why Roll Over Equity?
In some jurisdictions, rolling over equity can provide tax advantages by deferring the capital gains tax on the rolled-over amount. The tax is only paid when the equity is ultimately sold, which can result in a significant tax deferral benefit.
Lower Initial Exit Risk
Preservation of Legacy
Shared Risk
At Touchstone Advisors we can discuss Rollover Equity as an option when structuring the transaction. We work closely with our client’s deal team professionals including accountant, attorney and wealth advisor to achieve the best outcome for our client. Contact us to start the conversation.
Steven Pappas, M&A MI
Partner, Managing Director
Touchstone Advisors
860-669-2246
spappas@touchstoneadvisors.com
