Rolling Equity 101: How Founders Can Maximize Value When Selling Their Business

When business owners consider selling their company, the term “rolling equity” often comes up in conversations with advisors and investors. But what exactly does rolling equity mean and how does it impact the transaction? Simply put, rolled equity represents the portion of ownership that the seller retains after the sale rather than cashing out completely.

While it may seem counterintuitive to hold onto shares when the goal is to sell the business, an equity roll can actually be mutually beneficial for both the seller and buyer if structured properly. Rolling equity allows founders to receive additional value beyond just the initial sale proceeds by participating in the company’s future growth and success. At the same time, a meaningful founder roll signals confidence in the business to investors.

The key is finding the right balance between liquidity today and potential upside tomorrow. Here are some important considerations for founders when navigating an equity roll:

Distinguish Between Role and Roll

First, it’s critical to separate the concepts of the operational role you will play post-transaction versus your ongoing economic ownership via rolled equity. Just because you are retaining a stake doesn’t necessarily mean you need to continue in your current day-to-day responsibilities if that is not your desire.

Have an open discussion with potential investors about where your skills and relationships can be most impactful for the business moving forward. That may mean staying on as CEO, transitioning to a different position, or exiting operations entirely. The beauty of an equity roll is that it allows for flexibility to design a role that makes sense for all parties.

Rolling Equity with an Independent Sponsor Private Equity Firm

For small businesses with revenues between $1M-$5M, an independent sponsor private equity firm like Twelve31 can be an ideal partner for a founder seeking to roll equity. These focused investors provide both capital and operational support to help take companies to the next level of growth.

In a typical deal with a independent sponsor PE firm, the investor will acquire a majority stake while the founder retains a meaningful minority ownership position. This allows the seller to de-risk by taking some chips off the table, while still participating in the upside potential as the company scales.

The PE firm will often work closely with the founder to implement strategic initiatives, professionalize operations, and pursue add-on acquisitions. As the company hits growth milestones, there may be opportunities for the founder to sell additional tranches of equity at higher valuations or even regain majority control in the future.

Tips For Rolling Successfully

Ultimately, a successful equity roll boils down to partnering with an investor you genuinely believe in and who believes in you. Spend time ensuring there is alignment on a shared vision for responsibly growing the business before signing on the dotted line. Ask for references to vet the investor’s track record of working constructively with management.

Also be sure you have faith in the company’s future prospects. If you harbor doubts about the outlook or your ability to work well with new ownership, keeping skin in the game may lead to a toxic situation. Measure the risk/reward of the proposed roll terms – what needs to happen for you to participate in the upside and what could be asked of you along the journey.

When structured thoughtfully, an equity roll allows founders to take some money off the table today while still being able to enjoy the fruits of the company’s compounding value over time. By keeping some accountability and upside, sellers can maximize their overall proceeds in a way that is healthy for the brand, the team, and their own financial future. Like most things in life, a bit of moderation and long-term thinking goes a long way.

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