When a private equity firm buys a company, it rarely pays the whole price in cash. It asks the owner to reinvest part of the proceeds in the buyer’s new holding company. That reinvested piece is the rollover, and the pitch is always the same: a second bite of the apple when the firm sells the business again in a few years.
Sometimes the second bite is bigger than the first. Sometimes it never comes. The percentage you roll gets all the attention, but what decides the outcome is the security you receive, the debt above it, and the rights that come with it.
What rollover equity is
In a typical deal, the private equity firm sets up a new holding company, puts in its own money and borrowed money, and buys your company. You take most of your price in cash and contribute the rest, in shares or units of your company, to the new holding company in exchange for equity in it.
Why buyers want it. It keeps you invested in the outcome, it reduces the cash the firm has to raise, and it signals to lenders and to the next buyer that the founder believes in the plan.
How big it usually is. There’s no standard. Middle-market rollovers often land between 10% and 30% of the seller’s proceeds, with about 20% a common figure, and founder-led deals can go higher. Watch the denominator: 20% of your proceeds is not the same as 20% of the new company, which also carries the firm’s equity and the debt.
How the tax deferral works
Structured correctly, the rolled portion isn’t taxed at closing. The cash you take is.
- Into a partnership or LLC: the contribution generally qualifies for deferral under Section 721 of the tax code.
- Into a corporation: Section 351 can defer it, but only if the people contributing property and cash together, usually you and the private equity fund, control at least 80% of the corporation immediately afterward.
- Tied to your job: equity that vests only if you keep working, or that you forfeit if you leave, can be treated as compensation and taxed as ordinary income.
Deferred, not forgiven. Your old tax basis carries over to the new equity, so the gain you didn’t pay tax on at closing is taxed when the rollover is sold. Where you live at that second sale can matter for state tax, which is one reason owners planning a move read the New York and Florida guide early.
The second bite, in numbers
A fictional, simplified example. Your share of the price is $20 million. You take $16 million in cash and roll $4 million into the new company at the same valuation. Five years later the private equity firm sells. What your $4 million becomes depends on what happened to the equity in between:
| Equity value at the next sale | Your rollover | What it means |
|---|---|---|
| Half what it was | $2 million | Debt or a weak market ate the value |
| Unchanged | $4 million | Five years of waiting for no gain |
| Double | $8 million | The second bite most pitches describe |
| Triple | $12 million | The outcome that makes rollovers famous |
This ignores fees, preferred returns, dilution and taxes, and real outcomes can fall outside these rows in both directions. The point is the spread. Private equity firms use debt, which magnifies results both ways, so a rollover behaves more like a leveraged bet on one company than like a share of the price you already agreed.
The terms that decide the outcome
The same security as the firm
Best case, you hold the same equity as the fund, paid out side by side. If the fund holds preferred equity with a return that’s paid first, your common equity sits behind it.
Debt at the holding company
Every dollar of debt is paid before equity. More debt means more upside if things go well and less cushion if they don’t.
Dilution
New management incentive equity and future acquisitions can shrink your percentage. Ask how big the incentive pool is, and whether you can invest alongside new money to keep your share.
Tag-along and drag-along
Tag-along lets you sell when the firm sells, on the same terms. Drag-along lets the firm force you to sell. You want the first and should expect the second.
Information and voice
Regular financials at a minimum. A board seat or observer role is worth asking for when the rollover is large.
If you leave
Leaver clauses can let the company buy back your equity, sometimes at cost rather than fair value, if your employment ends. Read them before you sign an employment agreement.
How much to roll
Start from your family’s numbers, not the buyer’s ask. The cash at closing has to fund the life you’re selling the business to pay for: taxes, spending, the people you support, and a margin for error. Only the money left over belongs in a stake you can’t touch for five years or more and could lose.
Count everything still tied to the business. A rollover, an earnout and a seller note all depend on the company you just sold. Add them together before deciding how much more to leave behind. Cash at close vs. seller note vs. earnout walks through the trade-offs.
Estate planning with rollover equity
Right after closing, a rollover stake is illiquid and gives you no control, and appraisers often value interests like that at a discount. That can make it an efficient asset to move into trusts for children before the growth the firm is planning for. It only works with a qualified appraisal and an estate attorney, it has to be timed around the deal documents, and New York’s own estate tax adds its own math. The 2026 estate-tax guide covers the thresholds.
How Morrowgate handles this. Morrowgate models the rollover inside your family’s plan before the letter of intent: what the cash at closing has to cover, how much can sit in an illiquid stake for five years or more, and what the equity terms mean for the second check. Your deal attorney negotiates the equity documents and your CPA confirms the tax treatment. We keep the rollover on the family balance sheet and plan for the day it turns into cash, so that money already has a job when it arrives.
Questions owners ask
Can I refuse to roll equity?
Sometimes. Many private equity buyers expect some rollover, and the amount is negotiable. Rolling less can cost you on price or other terms, so weigh it against what you’d give up, not on principle.
Is rollover equity taxed at closing?
The rolled portion can be deferred if the deal is structured for it under Section 721 or Section 351. The cash you receive is taxed, and equity tied to continued employment can be taxed as ordinary income.
When do I get paid on the rollover?
Usually when the private equity firm sells the company, often three to seven years later. Some companies refinance and pay a dividend earlier, but you shouldn’t count on it.
Does QSBS apply to rollover equity?
In limited cases, and the rules are technical. If your company already qualifies, read the QSBS guide and raise it with your CPA before the structure is set.
Where this guidance stops
This article is general education on rollover equity in private equity transactions: how the rules and the options generally work. It is not tax, legal or investment advice, and nothing here is a recommendation for your situation. Rules change and outcomes turn on the facts, which is why a CPA and an attorney look at a family’s own numbers before anything is done.
Sources
- Alston & Bird: Equity rollovers
- Porte Brown: Rollover equity in private equity deals
- 26 U.S.C. 721: contributions to a partnership
- 26 U.S.C. 351: transfers to a controlled corporation
- 26 U.S.C. 368(c): the 80% control test