{"concept_id":"ALTSS-PE-021","slug":"rollover-equity","canonical_name":"Rollover Equity","aliases":["equity rollover","seller rollover"],"kind":"term","authority":"industry","facets":["DTM"],"domains":["PRIVATE-EQUITY","INDEPENDENT-SPONSORS"],"display_title":"Rollover Equity","search_aliases":["what is rollover equity","rollover equity in private equity","management rollover meaning","how does an equity rollover work","is rollover equity taxable","seller rollover independent sponsor"],"disambiguation":"Not the same as rolling over a loan (refinancing it) or an LP electing to \"roll\" its fund interest into a continuation vehicle, although both are also called rollovers.","one_sentence_definition":"Rollover equity is the part of a seller's or manager's existing ownership that is reinvested into the buyer's acquisition vehicle instead of being paid out in cash, so the seller keeps a stake in the business after the sale.","plain_english":"When a private equity fund buys a company, the founders or managers often take most of their proceeds in cash and reinvest the rest alongside the buyer. That reinvested portion is rollover equity. It reduces the cash the buyer must raise, keeps the sellers financially tied to the outcome, and gives them a share of a second sale if the business grows.","parent_concepts":["leveraged-buyout"],"child_concepts":[],"related_concepts":["management-incentive-plan","earnout","seller-financing","sources-and-uses","independent-sponsor","secondary-buyout","management-buyout","drag-along-rights","tag-along-rights","holding-company"],"comparison_concepts":[],"not_the_same_as":[{"slug":"management-incentive-plan","distinction":"A management incentive plan (MIP) grants new incentive equity to executives, often on geared terms; rollover is reinvestment of value the seller already owns, usually at the sponsor's price."},{"slug":"earnout","distinction":"An earnout defers part of the price contingent on post-closing performance targets; rollover converts part of the price into ownership whose value depends on the eventual exit."},{"slug":"seller-financing","distinction":"Seller financing is a loan from the seller with interest and a repayment date; rollover is equity with no repayment obligation."},{"slug":"continuation-vehicle","distinction":"In a continuation-vehicle transaction an LP may roll its fund interest into the new vehicle; that is an election in a fund restructuring, not a reinvestment in a portfolio company."}],"formula_ids":[],"worked_examples":[{"title":"Illustrative founder rollover in a buyout ($ millions)","paragraphs":["A sponsor buys a company for 400 on a cash-free, debt-free basis (fees ignored). The founder owns 100% and agrees to roll 20%, or 80, into the new holding company, taking 320 in cash at closing. The deal is funded with 100 of acquisition debt, 220 of sponsor equity and the founder's 80 of rolled equity. If the founder receives the same security as the sponsor, it owns 80 / 300 = 26.7% of the holding company's equity. Five years later the holding company's equity is sold for 750. The founder's stake is worth 26.7% × 750 = 200, a **2.5x** multiple on the rolled value, and its total proceeds are 320 + 200 = 520 against 400 for selling everything at entry. The second payment depended on the sponsor's exit and ranked behind the acquisition debt throughout."],"calc":{"fn":"moic","inputs":{"invested":80,"realized":200,"unrealized":0},"expected":{"moic":2.5},"tol":0.005}}],"sections":[{"heading":"How a rollover works","paragraphs":["The purchase agreement fixes an equity value for the target. Instead of receiving all of it in cash, the rolling seller exchanges part of its target shares for shares or units of the buyer's top holding company, or sells for cash and immediately subscribes for new shares with part of the proceeds. Rolled shares are normally issued at the same price per unit the sponsor pays, so a rollover is not a price concession: it changes the form of consideration, not its amount.","In the [sources and uses](/glossary/sources-and-uses) table, rolled equity is a non-cash source that reduces the sponsor equity and debt needed to fund the purchase. The rolled stake sits in a [holding company](/glossary/holding-company) above the debt-financed operating group, so it is structurally junior to the acquisition debt and is the first capital at risk alongside the sponsor's equity."]},{"heading":"Management rollover and seller rollover","paragraphs":["A management rollover is reinvestment by executives who stay with the business, usually alongside a separate [management incentive plan](/glossary/management-incentive-plan). The distinction matters: rolled equity is bought with value the manager already owns, at the sponsor's price, while incentive equity is granted to reward future performance, often on more geared terms.","A seller rollover is reinvestment by a founder, family or corporate parent that may not stay in management. In a [secondary buyout](/glossary/secondary-buyout) the outgoing sponsor sometimes rolls part of its own stake, and management that rolled into the first buyout is often asked to roll again. Sponsors treat a meaningful rollover as evidence that the sellers believe in the plan; how much is rolled is negotiated deal by deal and there is no standard percentage."]},{"heading":"Same security or a different class","paragraphs":["Rolled equity can be issued as the same instrument mix the sponsor holds (a pro rata \"strip\") or as a different class. The difference is large when the sponsor invests partly through preferred shares or shareholder loans with a fixed accruing return and the rolling seller receives only common equity: the seller's stake then sits behind the sponsor's preferred return and behaves like a geared equity position, gaining more if the exit is strong and losing more if it is weak.","Because the sponsor controls the timing and terms of exit, rollover holders negotiate minority protections: [tag-along](/glossary/tag-along-rights) rights to sell on the same terms, the reach of the sponsor's [drag-along](/glossary/drag-along-rights) right, information rights, pre-emption on new issues, transfer restrictions and, for managers, leaver provisions that can force a sale of rolled shares if they leave."]},{"heading":"Tax treatment","paragraphs":["Many tax systems allow gain to be deferred when shares are exchanged for shares or interests of the acquiring group rather than sold for cash, but each sets conditions, and a structure that fails them can make the rolled value taxable at closing without any cash to pay the tax. Two examples, as of 2 October 2026:","- **United States.** Under the Internal Revenue Code, no gain or loss is recognised on a contribution of property to a partnership in exchange for an interest in it (section 721(a)), except that gain is recognised on a transfer to a partnership that would be treated as an investment company if it were incorporated (section 721(b)). For a corporate buyer, no gain or loss is recognised on a transfer of property solely in exchange for the corporation's stock only if the transferors together control it immediately afterwards (section 351(a)), meaning ownership of stock with at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock (section 368(c)); where cash or other property is received as well, gain is recognised up to the cash and the value of that property (section 351(b)).\n- **United Kingdom.** Under the Taxation of Chargeable Gains Act 1992, where a company issues shares in exchange for shares in another company and holds or will hold more than 25% of that company's ordinary share capital, or meets one of the section's other conditions, the exchange is treated as a reorganisation, not a disposal (sections 135 and 127). Section 137 counteracts any tax reduction where a main purpose of the arrangements is to reduce or avoid capital gains tax or corporation tax.","The type of buyer entity, the form of the exchange and the share of consideration paid in cash therefore all matter, and the same commercial rollover can be executed in different ways for different sellers."]},{"heading":"Rollover in independent-sponsor and smaller deals","paragraphs":["[Independent sponsors](/glossary/independent-sponsor) and search-fund buyers raise equity deal by deal and often use seller rollover to reduce the equity they need and to show capital providers that the seller has confidence in the business. Rollover is frequently combined with [seller financing](/glossary/seller-financing) and an [earnout](/glossary/earnout), letting the buyer meet a seller's headline price with less cash at closing. For the seller, each of these moves part of the price from certain cash to a claim that depends on the new owner's performance and exit."]},{"heading":"How lenders and LPs treat rolled equity","paragraphs":["Lenders count rolled equity as part of the equity cushion beneath their debt when they assess the equity contribution. For a fund, rolled equity is not fund capital: deal-level [MOIC](/glossary/moic) and IRR for the fund are computed on the fund's own invested capital and its share of proceeds, and the rollover holders' share of exit value is excluded. An LP comparing ownership percentages across deals should check whether the reported stake is before or after rollover and incentive equity."]}],"classification_rules":["Equity reinvested by a seller or manager out of sale proceeds into the buyer's vehicle: rollover equity.","New equity granted to managers as an incentive, even if subscribed at a nominal price: management incentive plan.","A minority stake the seller simply keeps in the target when no new holding company is used: retained stake. Practitioners often still call it rollover; record that no exchange took place."],"calculation_rules":[],"common_mistakes":["Treating rollover as a discount to the price. Rolled equity is valued at the deal price; it reduces the cash the buyer needs, not what the seller is paid.","Assuming rolled equity carries the sponsor's economics. If the sponsor holds preferred or shareholder loans and the seller holds only common, the seller's return profile is different and more geared.","Assuming every share-for-share exchange is tax-deferred. Deferral depends on the jurisdiction and the structure.","Including rollover in the fund's invested capital when computing the fund's deal MOIC or IRR."],"edge_cases":["A seller that also has an earnout can face conflicting incentives: actions that raise the earnout metric in the measurement period may not maximise exit value for the rolled stake.","In a corporate carve-out the parent's retained stake raises accounting questions for the retained interest and conflicts in the ongoing commercial agreements between parent and business; both need specialist review.","Management that rolled into a previous buyout and rolls again in a secondary buyout has proceeds and stakes in two transactions; alignment has to be traced across both."],"external_standard_mappings":[],"source_ids":["SRC-UK-LEG-TCGA-1992-S135","SRC-US-USC-26-351","SRC-US-USC-26-368","SRC-US-USC-26-721"],"citations":[{"source_id":"SRC-US-USC-26-721","pinpoint":"26 U.S.C. 721(a), (b)","supports":"No gain or loss on contribution of property to a partnership for an interest; gain recognised on a transfer to a partnership that would be an investment company if incorporated","source":{"source_id":"SRC-US-USC-26-721","title":"26 U.S.C. 721 - Nonrecognition of gain or loss on contribution (partnerships)","publisher":"U.S. Congress (Internal Revenue Code; LII mirror)","document_type":"statute","url":"https://www.law.cornell.edu/uscode/text/26/721","publication_date":"Current US Code text as published by LII (accessed 2026-10-02)","jurisdiction":"US","status":"in force","last_verified":"2026-10-02"}},{"source_id":"SRC-US-USC-26-351","pinpoint":"26 U.S.C. 351(a), (b)","supports":"Nonrecognition on transfer to a corporation solely for stock where transferors are in control immediately after; gain recognised up to money and other property received","source":{"source_id":"SRC-US-USC-26-351","title":"26 U.S.C. 351 - Transfer to corporation controlled by transferor","publisher":"U.S. Congress (Internal Revenue Code; LII mirror)","document_type":"statute","url":"https://www.law.cornell.edu/uscode/text/26/351","publication_date":"Current US Code text as published by LII (accessed 2026-10-02)","jurisdiction":"US","status":"in force","last_verified":"2026-10-02"}},{"source_id":"SRC-US-USC-26-368","pinpoint":"26 U.S.C. 368(c)","supports":"Control = ownership of stock with at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock","source":{"source_id":"SRC-US-USC-26-368","title":"26 U.S.C. 368 - Definitions relating to corporate reorganizations (incl. 368(c) control)","publisher":"U.S. Congress (Internal Revenue Code; LII mirror)","document_type":"statute","url":"https://www.law.cornell.edu/uscode/text/26/368","publication_date":"Current US Code text as published by LII (accessed 2026-10-02)","jurisdiction":"US","status":"in force","last_verified":"2026-10-02"}},{"source_id":"SRC-UK-LEG-TCGA-1992-S135","pinpoint":"TCGA 1992 ss.135(1)-(3), 127, 137(1)-(1B)","supports":"UK share-for-share exchange treated as a reorganisation (no disposal) where Case 1-3 conditions are met; anti-avoidance counteraction where a main purpose is to reduce or avoid CGT or corporation tax","source":{"source_id":"SRC-UK-LEG-TCGA-1992-S135","title":"Taxation of Chargeable Gains Act 1992, ss.127, 135 and 137 (reorganisations; exchange of securities for those in another company; anti-avoidance)","publisher":"UK Parliament (legislation.gov.uk)","document_type":"statute","url":"https://www.legislation.gov.uk/ukpga/1992/12/section/135","publication_date":"Revised text; ss.135 and 137 pages up to date with changes in force on or before 1 October 2026; s.127 on or before 30 September 2026","jurisdiction":"UK","status":"in force","last_verified":"2026-10-02"}}],"faq":[{"q":"Is rollover equity taxed at closing?","a":"It depends on the jurisdiction and the structure. Many systems allow deferral when shares are exchanged for shares or interests of the acquirer, but conditions apply. In the US, for example, section 351 of the Internal Revenue Code requires the transferors to control a corporate buyer (at least 80%) immediately after the exchange; in the UK, section 135 of the Taxation of Chargeable Gains Act 1992 sets its own conditions and section 137 counteracts tax-avoidance arrangements. A structure that fails the conditions can create tax without cash to pay it."},{"q":"How much equity do sellers usually roll?","a":"There is no standard percentage. The amount reflects the buyer's alignment and financing needs and the seller's appetite for continued risk, and is negotiated deal by deal."}],"seo":{},"first_published":null,"last_reviewed":"2026-10-02","last_modified":"2026-10-02","content_version":"2.0.0","url":"https://altss.com/glossary/rollover-equity","json_url":"https://altss.com/reference/concepts/rollover-equity.json","title":"Rollover Equity","formulas":[],"sources":[{"source_id":"SRC-UK-LEG-TCGA-1992-S135","title":"Taxation of Chargeable Gains Act 1992, ss.127, 135 and 137 (reorganisations; exchange of securities for those in another company; anti-avoidance)","publisher":"UK Parliament (legislation.gov.uk)","document_type":"statute","url":"https://www.legislation.gov.uk/ukpga/1992/12/section/135","publication_date":"Revised text; ss.135 and 137 pages up to date with changes in force on or before 1 October 2026; s.127 on or before 30 September 2026","jurisdiction":"UK","status":"in force","last_verified":"2026-10-02"},{"source_id":"SRC-US-USC-26-351","title":"26 U.S.C. 351 - Transfer to corporation controlled by transferor","publisher":"U.S. Congress (Internal Revenue Code; LII mirror)","document_type":"statute","url":"https://www.law.cornell.edu/uscode/text/26/351","publication_date":"Current US Code text as published by LII (accessed 2026-10-02)","jurisdiction":"US","status":"in force","last_verified":"2026-10-02"},{"source_id":"SRC-US-USC-26-368","title":"26 U.S.C. 368 - Definitions relating to corporate reorganizations (incl. 368(c) control)","publisher":"U.S. Congress (Internal Revenue Code; LII mirror)","document_type":"statute","url":"https://www.law.cornell.edu/uscode/text/26/368","publication_date":"Current US Code text as published by LII (accessed 2026-10-02)","jurisdiction":"US","status":"in force","last_verified":"2026-10-02"},{"source_id":"SRC-US-USC-26-721","title":"26 U.S.C. 721 - Nonrecognition of gain or loss on contribution (partnerships)","publisher":"U.S. Congress (Internal Revenue Code; LII mirror)","document_type":"statute","url":"https://www.law.cornell.edu/uscode/text/26/721","publication_date":"Current US Code text as published by LII (accessed 2026-10-02)","jurisdiction":"US","status":"in force","last_verified":"2026-10-02"}]}