When selling your business, price isn’t the only thing that matters—how you get paid is just as important. In the lower middle market, deals are often structured with equity rollovers, earnouts, or a mix of both. Understanding these options can help you maximize value while minimizing risk.
What Is an Equity Rollover?
In an equity rollover, you sell most of your business but keep a minority ownership stake. Under new ownership, the company aims to grow. If it does well, you may receive a second payout—sometimes even larger than the first.
Pros:
✔ Immediate liquidity while keeping skin in the game
✔ Potential for a larger long-term payout
✔ Aligns your interests with the new owner’s success
Cons:
✖ Future payout isn’t guaranteed
✖ Less control over business decisions
✖ Requires trust in the new ownership group
Private equity buyers frequently use equity rollovers. They want sellers involved to help drive future growth. This setup appeals to business owners who believe in their company’s long-term prospects and the buyer’s ability to add value.
What Is an Earnout?
An earnout ties part of the sale price to future company performance. This is usually measured by revenue, gross profit, EBITDA, or other agreed-upon targets over 1 to 3 years. If the business hits those goals, you get paid. If not, that portion of the sale price may be reduced or forfeited.
Pros:
✔ Can help bridge a valuation gap between buyer and seller
✔ Provides potential upside if the business thrives
✔ Makes the deal more attractive to buyers concerned about risk
Cons:
✖ Payment is not guaranteed
✖ Usually but not always dependent on the buyers performance
✖ Can lead to disputes over financial reporting and performance metrics
Earnouts are common when a buyer sees potential but wants to mitigate risk—especially if the business’s future performance is uncertain. However, sellers should be cautious and ensure that performance targets are realistic and clearly defined.
Equity vs Earnout: Which Option Is Better for Your Business Sale?
It depends. Your goals, risk tolerance, and confidence in the business’s future all play a role. If you want a clean break, an all-cash deal is ideal but not always possible. Equity rollovers can be attractive if you believe in future growth, while earnouts require careful negotiation to ensure fair terms.
At BMI Mergers & Acquisitions, we help business owners navigate these decisions and structure deals that maximize value while protecting their interests. If you’re considering a sale, let’s talk about the best path forward.
Contact us to discuss your exit strategy.