Rollover Equity: Transitioning from Owner to Investor
Seller rollover equity is when a business owner keeps some ownership in the company after selling it. The new transaction structure can look like this: the buyer holds 75% to 90%, and the seller keeps an ownership percentage of 10% to 25%. This exit strategy is called "rollover equity." It means the seller becomes a minority owner and stays involved, but with a smaller role.
Before the sale, the owner controls everything. After the sale, an acquirer owns most of the business, but the seller holds a share. The seller may no longer be in charge, but they still benefit if the company's value grows, has an IPO, or if it sells again later. The buyer often wants rollover equity because it shows that the seller believes in the company's future post-acquisition. It also gives the seller incentive to help with the post-transaction transition.
This works well when the seller wants to stay connected, but with less decision-making. It can also close the deal faster, since the seller is taking part of the risk.
When Is Rollover Equity Common (and When Is It Not)?
Rollover equity is especially common in lower middle market business sales, which often overlap with larger small business transactions. When buyers—whether they're private equity firms looking to roll up companies, strategic buyers, or individual investors—purchase your business, they often want you to keep some ownership. This keeps you aligned with the business's future success and shows you still believe in what you've built.
As a seller, keeping some skin in the game demonstrates confidence in your business and helps reassure buyers during the transition period.
Rollover equity works best when your business has:
- Strong, steady cash flow - Predictable income that doesn't rely entirely on your daily involvement
- Clear growth potential - Opportunities the new owner can pursue to increase value
- A solid management team already in place - Key people who can run operations without you
- Recurring revenue - Subscriptions, contracts, or repeat customers that provide stability
- Diversified customer base - Not overly dependent on one or two major clients
- Scalable operations - Ability to grow without massive upfront investments
- Healthy profit margins - Strong fundamentals that attract serious buyers
- Proven systems and processes - Business runs smoothly with documented procedures
Rollover equity is particularly common in industries like healthcare services, technology and software, business services, and manufacturing. These sectors typically offer the stable cash flow and growth potential that make buyers confident about shared ownership arrangements.
However, if your business heavily depends on your personal relationships or expertise, or if the growth path isn't clear to potential buyers, buyers may prefer a complete ownership transfer instead.
Key Benefits and Drawbacks
Rollover equity has several benefits for a seller. One of the biggest is the chance at a "second bite of the apple" (a chance to profit again when the business sells in the future). If the private equity buyer or PE firm grows the company's equity and sells it again, the original seller could earn more sale proceeds than they did from the first sale.
There may also be tax advantages. By rolling over part of the sale, it may be tax-deferred for the seller, depending on how the deal is structured for capital gains.
Rollover equity can also help bridge valuation gaps. If the buyer and seller can't agree on a price, keeping some ownership can help close the deal.
There are drawbacks too. Even though the seller still has an equity stake, they no longer have control. Decisions are now made by the new majority equity holder. If the business struggles or is mismanaged, the seller's remaining ownership stake could lose value.
Rollover equity works best when both sides see long-term potential. But the seller must be ready to let go of control and take on new risks.
Alternatives to Consider
If rollover equity isn't the right fit, there are other ways to meet both the seller's and buyer's needs:
- Seller financing. The seller loans part of the purchase price to the buyer, who repays it over time. This keeps the seller financially involved without keeping ownership.
- Earnouts. Part of the sale price is paid after a holding period based on how the business performs. This rewards the seller for future success, but doesn't require them to stay on as an owner.
- Consulting agreements. The seller stays involved short-term to help with training or advice, but without holding equity stake. It's a simple way to support the transition.
Negotiating Rollover Equity
During due diligence and negotiations, one of the first things to decide is how much ownership the seller will keep. In small to mid-sized deals, the new equity amount is typically 10% to 25% of the business. The exact percentage depends on the deal size, buyer preference, and how involved the seller wants to remain.
The exit timeline is also important. Sellers need to understand how long they'll keep their rolled equity before a future sale or liquidity event. Some deals may include a clear timeline for the next sale, while others leave it flexible. It's important for the seller to know how and when they might get paid out.
SBA Financing and Rollover Equity: Important Changes
As of June 2025, SBA financing now allows rollover equity structures where you can retain partial ownership after selling your business. However, there are significant new requirements that many sellers find unattractive.
Key Requirements Under New SBA Rules:
Personal Guarantee Requirement: If you retain any ownership percentage in your business after the sale - even just 5% or 10% - you must personally guarantee the entire SBA loan amount for at least two years.
Co-Borrower Status: You'll be required to be listed as a co-borrower on the SBA loan alongside the buyer, which means you share responsibility for the debt.
Stock Purchase Only: SBA financing for rollover equity deals must be structured as stock purchases rather than asset purchases, which may have different tax and liability implications.
What This Means for You:
While rollover equity is now technically allowed with SBA financing, the personal guarantee requirement has made this structure less appealing to some sellers. You'll need to carefully weigh whether the potential upside of keeping ownership is worth taking on personal liability for the buyer's loan.
To learn more about negotiating strategies and structuring the deal when selling your business, visit BizBuySell's Learning Center.