While many business owners contemplating an exit focus on the cash-at-closing figure, modern pest and lawn M&A deals often include a component known as rolling equity.
This concept, also known as getting a “second bite of the apple,” is standard when dealing with private equity buyers. These firms are financial experts, not pest control operational pros. In many cases they need your expertise and “skin in the game” to ensure the business continues to thrive after the sale.
Here’s how this structure works and what it means for you as a potential seller.
What Is Rolling Equity?
In a typical equity roll, you don’t take 100 percent of your sale price in cash. Instead, you reinvest a portion — often 10 percent to 20 percent — into the buyer’s new entity.
For example, if you sell your business for $10 million, you might take $8 million in cash and “roll” $2 million into the buyer’s fund. You are essentially trading a piece of your company for a piece of a much larger, diversified pest control platform.
Here’s how an all-cash deal might compare to a 20 percent equity roll deal:
| Deal Component | 100% Cash Deal | 20% Equity Roll Deal |
|---|---|---|
| Total Enterprise Value | $10,000,000 | $10,000,000 |
| Cash at Closing | $10,000,000 | $8,000,000 |
| Rolled Equity (Reinvestment) | $0 | $2,000,000 |
| Estimated Tax at Closing (20%) | -$2,000,000 | -$1,600,000 |
| Net Cash in Pocket (Day 1) | $8,000,000 | $6,400,000 |
| Potential Future Value of Net Cash Invested for Two Years (12% Per Year) | $10,035,200 | |
| Potential Future Value of Roll (3x) After Two Years | $0 | $6,000,000 |
| Tax on Gains After Two Years (20%) | -$407,040 | -$1,200,000 |
| Total Potential Proceeds | $9,628,160 | $11,200,000 |
Pros of Rolling Equity
- The Second Bite: The goal is for that rolled $2 million to grow. When the private equity firm eventually sells the entire platform in three to five years, your share could potentially double or triple in value.
- Immediate Tax Deferral: You only pay capital gains tax on the cash you receive at closing. The portion you roll is typically tax-deferred until the liquidity event down the road.
- Staying Involved: You often stay on as a manager or consultant. You get to run your operation with the backing of a large corporation, better benefits and more administrative support.
Cons of Rolling Equity
- Lack of Control: Once you roll equity, you are a minority shareholder. You no longer make the final call on the company’s direction or when the ultimate sale happens.
- Illiquidity: Your money is tied up. You cannot call a broker and sell these shares like you would a public stock. You must wait for the buyer to exit.
- Performance Risk: If the platform struggles or the buyer mismanages the roll-up of multiple companies, your investment could lose value.
What to Consider Before You Roll Equity
Before agreeing to an equity roll as part of your pest control or lawn care exit planning strategy, ask these four questions:
- What is the time horizon? Most private equity funds aim to exit within three to seven years. Make sure their timeline aligns with your personal retirement goals.
- Do you like the team? You will be working for these people. If you don’t trust their vision or management style, rolling equity is a risky bet. Also make sure that your initial equity roll is not tied to any performance agreement of yours as an employee. For example, if you quit or get fired, your equity remains in place and is not forfeited or diminished in any way.
- What are the classes of stock? Ensure your “common units” aren’t so far down the priority list that you get nothing if the eventual sale price is lower than expected.
- What are the tax implications? Taxes that will be paid on the equity roll will be deferred until you exit. At the end of the day, selling your business and potentially considering an equity roll is a complex decision.
Ready to see what your business is worth?
The right deal structure is just as important as the sale price. Get in touch with PCO Bookkeepers & M&A Specialists today to get your business ready to sell, evaluate your options and maximize the after-tax value of your eventual deal.
