Rollover equityvsEarnout
Two ways to defer part of a seller's consideration. Rollover keeps you invested; earnout makes you prove the future. They look similar and behave very differently.
The one-sentence difference
Rollover equity is a tax-deferred re-investment of seller proceeds into the buyer's holding company at close. Earnout is contingent consideration tied to future performance milestones (usually EBITDA-based) paid over 1–5 years.
Side-by-side
| Dimension | Rollover | Earnout |
|---|---|---|
| When paid | Locked in at close as an equity interest | Paid over 1–5 years contingent on performance |
| Certainty | Certain — you own the equity | Contingent — you have to earn it |
| Control over outcome | Depends on platform success (limited direct control) | Depends on target performance (some direct control if seller stays) |
| Typical size | 10–30% of transaction proceeds | 10–25% of transaction proceeds |
| Duration | Until platform sale (typically 4–7 years) | 1–5 years |
| Tax treatment | Deferred until platform sale (§721 rollover) | Ordinary or capital as milestones hit; taxed on receipt |
| Buyer preference | Preferred (aligns seller with platform outcome) | Used to bridge a valuation gap |
| Seller preference | Preferred (upside without earning it back) | Reluctantly accepted when needed to bridge price gap |
When to use which
When a PE buyer wants the seller aligned with platform growth, or when the seller wants a tax-deferred second bite. Very common in sponsor-backed home-services deals.
Full article on Rollover equity →When buyer and seller can't agree on price for a specific reason (uncertain forecast, customer-concentration risk, growth-dependent valuation). Bridges the gap without either side committing.
Full article on Earnout →What they have in common
Both are non-cash components of the transaction. Both delay some portion of the total consideration. Both should be structured with clear terms that specify the exact mechanics (rollover: %, class of equity, drag rights; earnout: milestone, measurement window, protective covenants).
Frequently asked
Which is better for the seller?
Rollover is generally more seller-friendly because it's certain (you own the equity) and tax-deferred (no gain until the platform sells). Earnout is contingent and taxed as earned. Well-structured deals often use both — some rollover for alignment, some earnout for gap-bridging.
Can I refuse an earnout?
Sometimes yes — a strong sell-side process with multiple bidders lets you push earnout money into upfront cash. But if the only reason a buyer's at $X price is because $X includes an earnout, refusing means accepting a lower headline number in cash.