Rollover Equity in an LBO

How does rollover affect sponsor funding and ownership?

A seller reinvests 1,200 rather than taking all proceeds in cash. The LBO Model treats that amount as rollover equity within the acquisition funding and applies its existing pro-rata management-dilution convention. Compare two otherwise identical deals, both with a 10% management interest.

Hold the transaction and operating forecast constant

All money is EUR thousands. Example Company has 2026 actuals and forecasts for 2027–2031. Annual revenue 4,000 less COGS 2,000 and overhead 400 gives EBITDA 1,600. D&A and capex are 200 each, EBIT 1,400 and tax rate 25%. Working-capital changes and other operating inputs are zero; unlevered FCFF is 1,050 each year. Opening PP&E and equity are 5,000 each. NOL use is disabled; deal tax is paid in the same period.

Entry is after 2026 and exit after 2031: five years under the actual model-period dates. Entry and exit use reported EBITDA and 6× unless a case explicitly changes them, so each base EV is 9,600. Acquisition cash is explicitly overridden to 100 and existing debt to zero; other entry and exit bridge items and exit fees are zero. Purchase equity is 9,700. This acquisition cash is a supplied deal assumption, not the default book-year cash.

New debt is 4,000 in one Amount tranche: cash interest 6%, PIK 0%, mandatory amortization 5% of the initial amount, maturity 2033, priority 0 and sweep eligible. Cash sweep is 50%, minimum cash 100, transaction and financing fees zero, and other sources and distributions zero. The two cases differ only in rollover: zero or 1,200.

Reconcile the smaller sponsor cheque

Total uses stay 9,700. Without rollover, 4,000 debt + 5,700 sponsor equity funds the purchase. With rollover, 4,000 debt + 1,200 rollover + 4,500 sponsor equity does so. Reinvestment reduces the sponsor cheque by 1,200; it does not reduce enterprise value or eliminate an acquisition use. LBO Sources and Uses explains the broader funding reconciliation.

The seller receives the modeled purchase equity value and reinvests part as a funding source. The model does not establish the tax or legal treatment of that reinvestment.

Apply the implemented ownership convention

Sponsor interest is sponsor equity / (sponsor equity + rollover) × (1 − management dilution). It is 90% with no rollover and 4,500 / 5,700 × 90% = 71.0526% with rollover. Rollover receives 1,200 / 5,700 × 90% = 18.9474%; management remains 10%. Sponsor, rollover and management interests sum to 100%.

Management dilution applies pro rata to sponsor and rollover interests. The 10% is an explicit ownership input, not a separately funded management cheque, vesting schedule or option pool. Enterprise Value vs Equity Value keeps transaction EV separate from the equity shared at exit.

Translate ownership into exit proceeds and returns

Both debt schedules are identical. Exit EV 9,600 plus cash 847.52 less debt 90.79 gives exit equity 10,356.73. With zero exit fees, sponsor proceeds are 9,321.05 without rollover and 7,358.73 with it.

The smaller cheque also receives a smaller share. Sponsor MOIC remains 1.6353× and dated IRR 10.3362% in both cases: the same exit equity per unit of sponsor-plus-rollover capital is scaled by the same 90% management factor. Rollover is not an automatic return improvement. MOIC vs IRR explains the two return measures.

Reproduce both ownership cases

1. Download no rollover and 1,200 rollover, open the LBO model and explicitly use Manage models → Import for each. In Model, switch to Advanced before editing, then return to Deals → LBO. A blank workspace may require Activate; the imported files already have LBO active. The CTA opens your workspace and does not import a file automatically.

2. Check Entry 2026, Multiple method, EBITDA and 6×; Exit 2031, EBITDA and 6×. In the EV → Equity bridge, use cash 100 and debt 0. Under Transaction structure & ownership, compare Rollover equity 0 / 1,200 and Management dilution 10%. Fees and other sources remain zero.

3. Open Sources & Uses and Sponsor returns. In the rollover case, set Rollover equity to 0 to reproduce the first case: sponsor funding returns to 5,700 and proceeds to 9,321.05, while MOIC and IRR remain the same. Restore 1,200. Debt and paydown settings above must stay fixed.

Keep rollover within the supported ownership model

This is simplified pro-rata participation. There are no preferred returns, liquidation preferences, vesting, option pools, carried interest, cap-table management or complex waterfalls. Other funding sources, if entered, carry no equity participation under the current convention. For a different overall debt/equity mix, continue to LBO Capital Structure.