Rolled equity, or “a rollover,” is when the existing owners of a business sell the majority of their ownership interest but maintain a minority stake in the new entity structure, essentially reinvesting a portion of the sale proceeds — usually 10 to 40 percent of total equity value — back into the company.
The primary reason for buyers to include a rollover in their purchase price is to ensure that buyer and seller interests are aligned post-closing. Structuring a purchase offer to include a rollover equity stake is also a way to narrow the gap between buyer purchasing power and total sale price. The result allows for acquirers to spend less cash at close. Additionally, a buyer can reduce some of the risk associated with an acquisition by sharing it with a minority owner.
Rollover equity is particularly intriguing to sellers who have built their business and want to continue to capitalize on its future success, often referred to as getting a “second bite of the apple.” In this scenario, an increase in value over the acquirers hold period — typically three to seven years when the buyer is a private equity group — means more money for the seller when the business is sold a second time. Instead of cash up front, the initial seller is deferring compensation in hopes of a larger future pay out. Accepting a rollover as a portion of purchase price can also allow the seller to achieve a higher overall enterprise value while providing the opportunity to defer taxes.
Recently, non-cash forms of purchase price, including rollovers, have become more common and a more significant portion of enterprise value. This has allowed buyers to maintain higher valuation multiples while facing a tighter credit market and general market uncertainty.
M&A Market Activity
Domestic deal volume trends were consistent with January, remaining below 2022 levels. U.S. M&A deal volume for the month of February 2023 was 28.3 percent lower compared to the month of February 2022.
The Central Ohio M&A market fared better than the broader domestic market in February 2023, as the area’s deal volume was level with February 2022. February 2023 realized several noteworthy transactions in the Central Ohio region, primarily driven by strategic acquirers. Central Ohio-based companies Crawford Hoying Management, Designer Brands, and Komar Industries completed strategic acquisitions within the month. In addition, Columbus-based venture capital firm LOUD Capital completed a portfolio exit of S’More.
Deal of the Month
On February 22, 2023, Installed Building Products announced the acquisition of Four State Insulation, a company that offers fiberglass and spray foam insulation installation services for residential properties. Based in Columbus, Installed Business Products is one of the United States’ largest insulation installers in the residential new construction market. The company has completed over 15 acquisitions in the last two years. Jeff Edwards, chairman and CEO of Installed Business Products said of the company’s growth strategy, “acquisitions remain a key component of our growth strategy and we continue to have a robust pipeline of opportunities across multiple geographies, products, and end markets.”
David Shibley is an Analyst with MelCap Partners, LLC, a middle-market investment banking advisory firm. For more information on MelCap Partners, please visit www.melcap.com or email [email protected].
