What Does Rolled Equity Mean?
Rolled equity is a term used to describe the receipt of shares from the buyer as full or partial consideration for the purchase of a selling company. It usually occurs between private company sellers and buyers, and is most often utilized by private equity firms and/or their platform companies. The equity isn't actually the same equity, but rather the component of the total purchase price that the seller receives in the form of the buyer's stock as part of the sale proceeds.
Divestopedia Explains Rolled Equity
The use of rolled equity is a key deal point that can work for either private company buyers or sellers. Usually, this "roll" occurs on a tax deferred basis, meaning that the value of the consideration shares of the company received does not have to pay tax immediately. The tax liability results when the buying company is ultimately sold, and the equity received by the original seller in the buying company is finally monetized.
The valuation of rolled equity as consideration can be a challenging task for sellers and their advisors when the buyer is private. This is because financial information isn't readily available, with the seller having to request this information and be able to assess it. The valuation of consideration shares is one of the trickiest deal terms for this reason, since sellers can inflate the value of their own stock as currency to purchase smaller companies. Occasionally, a fairness opinion may be required to assess the value of rolled equity.