Selling a business
Selling to private equity: how rollover equity works and is taxed
Private equity buyers often ask sellers to roll part of the price into the buyer's group. How rollover works, how it's taxed and what to negotiate.
When a private equity buyer acquires your business, it'll often want you to "roll" part of the price into shares in its own structure. That keeps you invested in the business's future, and it reduces the cash the buyer needs upfront.
For sellers, rollover can mean a valuable second payday. But it raises tax and commercial questions that need answering before you agree.
What is rollover?
Instead of receiving all of the price in cash, you take part of it in shares, and sometimes loan notes, issued by the buyer's holding company. Your rolled-over shares then rise or fall with the value of the whole group until the private equity house exits, typically some years later.
On a buy-and-build platform, the group grows by acquiring other businesses, and your stake is in the whole platform, not just your old company.
How rollover is taxed
The deferral
Where you exchange shares in your company for shares in the buyer's group, the gain on that part is usually deferred. It isn't taxed until you sell the new shares. The new shares are treated as if you'd held them since you acquired your original shares.
The exchange must be for genuine commercial reasons, not mainly to avoid tax. HMRC clearance is often obtained in advance for certainty.
Business Asset Disposal Relief
Deferral is usually helpful, but it carries a risk. When you eventually sell the new shares, you may not qualify for Business Asset Disposal Relief, because you're unlikely to hold 5% of a private equity group.
You can elect to crystallise the gain on the rolled-over part at the time of the sale, paying tax at the relief rate then, rather than deferring it. Whether that's worthwhile depends on the size of the gain, your remaining lifetime limit and your view of the future.
Loan notes in the structure
Rollover often includes loan notes, or preference shares, alongside ordinary shares. The type of instrument affects whether the gain is deferred and when tax is due.
The employment-related securities trap
If you'll work for the group after the sale, shares you acquire can be treated as employment-related securities. That can mean income tax charges if the shares are acquired for less than market value, or if their value is affected by restrictions such as leaver provisions.
Elections can often be made within a short window after the shares are acquired to manage this risk. Missing the deadline can be costly.
Commercial points to negotiate
- Instrument: are you getting the same shares as the private equity house (an "institutional strip"), or only ordinary shares that rank behind its preference shares and loan notes?
- Leaver terms: what happens to your shares if you leave, and at what value?
- Dilution: on a buy-and-build platform, every acquisition dilutes earlier shareholders. Joining earlier can mean a larger slice of the group.
- Exit rights: tag-along rights, drag-along rights, and when you can realise your investment.
What to do
- Decide how much you want to roll over, and in what form, before heads of terms.
- Model the tax with and without electing to crystallise the gain at completion.
- Obtain HMRC clearance where needed.
- Deal with employment-related securities issues, including any elections, on time.
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
