What Is Rollover Equity?
In a business acquisition, rollover equity refers to a deal structure where the selling owner retains a minority ownership stake in the business after the sale closes. Instead of receiving 100% of the purchase price in cash, the seller “rolls over” a portion of their equity into the new ownership structure.
For example, if a business is valued at $2 million and the seller rolls over 10% equity, the seller receives $1.8 million in cash (from the buyer’s equity injection, SBA loan, and seller financing) and retains a $200,000 ownership interest in the business going forward.
Rollover equity is becoming increasingly common in SBA-financed acquisitions because it benefits both buyers and sellers — and lenders often view it favorably. At GoSBA Loans, we’ve structured rollover equity into numerous deals across our 126+ closed SBA acquisitions and $320 million+ in 2025 funding. Here’s everything you need to know.
Why Buyers Like Rollover Equity
From the buyer’s perspective, rollover equity offers several compelling advantages:
1. Seller Alignment
When a seller retains ownership in the business, their financial interests remain aligned with the buyer’s success. This is arguably the most important benefit:
- Transition motivation: A seller with skin in the game is far more motivated to ensure a smooth transition, transfer relationships, and help the new owner succeed
- Ongoing support: Sellers with rollover equity are more likely to remain available for consultation, introductions, and problem-solving after the formal transition period ends
- Reduced adverse selection: A seller willing to retain equity is signaling confidence in the business’s future. If the seller wanted out entirely, that could be a yellow flag.
- Customer and vendor confidence: Key stakeholders may feel more comfortable knowing the previous owner still has a stake in the business’s success
2. Reduced Cash Required at Closing
Rollover equity effectively reduces the amount of cash the buyer needs to bring to the closing table. Since the seller is retaining equity rather than receiving cash for that portion, the total cash needed from the SBA loan and buyer equity injection is reduced:
- On a $2M deal with 10% rollover, the buyer only needs to finance $1.8M instead of $2M
- This can reduce the buyer’s required down payment
- It can also improve debt service coverage ratios, since the loan amount is smaller relative to business cash flow
- In tight deals where cash flow barely covers debt service, rollover equity can be the difference between loan approval and denial
3. Lender Confidence
SBA lenders generally view rollover equity positively because:
- It reduces the loan amount needed
- It demonstrates seller confidence in the business
- It creates ongoing seller engagement during the critical transition period
- It shows a collaborative buyer-seller relationship
Why Sellers Like Rollover Equity
Sellers aren’t just doing buyers a favor by rolling over equity — there are real benefits on their side too.
1. Tax Deferral
This is often the primary motivation for sellers. When structured properly, the rollover equity portion of the sale is treated as a tax-deferred exchange:
- No immediate capital gains tax on the rolled-over portion. The seller only pays capital gains when they eventually sell their remaining equity.
- Tax planning flexibility: The seller can time their eventual exit from the remaining equity to optimize their tax situation
- Installment sale benefits: Combined with seller financing, rollover equity can spread the tax liability over multiple years
For a seller with a low basis in their business (common for founders who built the company from scratch), the tax savings from deferring gains on even 10-20% of the sale price can be substantial — potentially hundreds of thousands of dollars.
2. Upside Participation
If the seller believes the business will grow under new ownership — perhaps because the buyer brings fresh energy, new skills, or growth capital — rollover equity lets the seller participate in that upside:
- If the business doubles in value over 5 years, the seller’s retained equity doubles too
- The seller gets to benefit from improvements they may have never had the resources or motivation to implement
- It can be emotionally satisfying for sellers who’ve built the business to remain part of the growth story
3. Higher Total Consideration
In some cases, sellers can negotiate a higher total valuation when offering rollover equity, because:
- The buyer’s risk is reduced (seller alignment), justifying a higher price
- The lender is more comfortable with a higher valuation when the seller retains skin in the game
- The effective purchase multiple can stretch slightly because the deal structure is more favorable overall
SBA Rules on Rollover Equity
The SBA has specific guidelines around rollover equity that affect how deals can be structured. Understanding these rules is essential for both buyers and sellers.
Ownership and Control Requirements
- The buyer must own at least 51%: SBA rules require that the borrower (buyer) owns a controlling interest in the business. Rollover equity cannot exceed 49% for the seller.
- Active management: The buyer must be actively involved in day-to-day management of the business. The seller’s retained equity should be a passive investment.
- No seller veto rights: The seller’s retained equity should not come with veto rights over major business decisions. The buyer must have operational control.
How Rollover Equity Affects the Loan
- Equity injection calculation: The SBA requires a minimum equity injection (typically 10-20% of the total project cost). Rollover equity may or may not count toward this requirement, depending on the lender and deal structure. Some lenders count it; others don’t.
- Valuation impact: The total enterprise value used for lending purposes typically includes the rollover equity. If the business is valued at $2M and the seller rolls over $200K, the total project cost may still be based on $2M.
- Standby requirements: Similar to seller notes, the seller’s equity position is typically on full standby — meaning the seller cannot receive distributions or dividends until the SBA loan is current and debt service coverage ratios are met.
- Personal guarantee: Sellers retaining 20% or more ownership may be required to provide a personal guarantee on the SBA loan — a significant consideration that should be addressed in negotiations.
Operating Agreement Requirements
When rollover equity is part of the deal, the operating agreement (for LLCs) or shareholders’ agreement (for corporations) must clearly address:
- Ownership percentages and capital accounts
- Voting rights and decision-making authority
- Distribution policies and preferences
- Buy-sell provisions (how and when the seller can exit their remaining equity)
- Non-compete and non-solicitation terms for the seller
- Tag-along and drag-along rights
- Valuation methodology for future buyout of seller’s equity
Common Rollover Equity Percentages and Structures
While every deal is unique, here are the most common rollover equity structures we see in SBA acquisitions:
5-10% Rollover (Most Common)
- Purpose: Primarily signals seller confidence and alignment
- Impact: Minimal impact on deal economics but meaningful signal to lenders
- Seller involvement: Typically passive; seller may serve as an advisor but isn’t involved in operations
- Exit timeline: Usually 2-3 years, giving the buyer time to stabilize and the seller time to fully transition
- Tax benefit: Modest tax deferral for the seller
10-20% Rollover (Common)
- Purpose: Meaningful alignment plus significant tax benefits for the seller
- Impact: Reduces buyer’s cash requirement noticeably; improves DSCR
- Seller involvement: May include a consulting agreement or advisory role for the seller
- Exit timeline: Typically 3-5 years, often tied to performance milestones or a put/call option
- Tax benefit: Significant capital gains deferral for the seller
- Note: At 20%+, the seller may be required to provide a personal guarantee on the SBA loan
20-30% Rollover (Less Common)
- Purpose: Often used when the business needs the seller’s continued involvement for a longer period
- Impact: Substantially reduces the amount financed; seller is a true partner (minority)
- Seller involvement: More active; seller may retain a specific operational role during the transition
- Exit timeline: 3-7 years, often with a structured buyout schedule
- Considerations: At this level, the buyer-seller relationship looks more like a partnership. Clear governance and exit terms are critical.
Structuring the Seller’s Exit from Rollover Equity
One of the most important aspects of any rollover equity deal is defining how and when the seller exits their remaining position. Common mechanisms include:
- Put option: Gives the seller the right to force the buyer to purchase their equity at a predetermined price or formula after a specified period
- Call option: Gives the buyer the right to purchase the seller’s equity at a predetermined price or formula after a specified period
- Scheduled buyout: A fixed timeline for the buyer to purchase the seller’s equity in installments
- Formula-based pricing: Typically based on a multiple of trailing EBITDA or SDE at the time of exit
- Right of first refusal: If the seller wants to sell to a third party, the buyer has the right to match the offer
Potential Pitfalls and How to Avoid Them
Rollover equity adds complexity to a deal. Here are common pitfalls to watch for:
- Unclear governance: Without a well-drafted operating agreement, disputes about decision-making authority can arise. Invest in good legal counsel.
- Seller interference: Some sellers struggle to let go, especially when they retain ownership. Clear boundaries around operational control are essential.
- Exit disputes: If the buyout terms for the seller’s remaining equity aren’t clearly defined, future disagreements are almost guaranteed.
- Tax complications: Rollover equity has specific tax implications that require professional guidance. Work with a CPA experienced in business acquisitions.
- Lender requirements: Some SBA lenders have specific requirements or restrictions around rollover equity. Not every lender handles it the same way.
- Distribution restrictions: Sellers with rollover equity may not receive any distributions until the SBA loan is performing — this needs to be clearly communicated and agreed upon.
How GoSBA Structures Rollover Equity Deals
At GoSBA, we have extensive experience structuring SBA acquisitions with rollover equity components. Here’s how we add value:
- Lender matching: Not all SBA lenders are equally comfortable with rollover equity. Our 50+ lender network means we can find lenders who embrace this structure and know how to underwrite it efficiently.
- Deal structuring: We help you determine the right rollover percentage, navigate SBA requirements, and structure the deal to maximize benefits for both buyer and seller.
- Free business plan and projections: Our complimentary projections (a $2,500-$5,000 value) model the impact of rollover equity on cash flow, debt service coverage, and the buyer’s return on investment.
- Experience-based guidance: With 126+ closed deals, we’ve structured rollover equity in numerous transactions and understand the nuances that make these deals work.
And as always, our service is completely free to borrowers. We’re compensated by lenders when your deal closes — our incentives are aligned with yours.
Is Rollover Equity Right for Your Deal?
Rollover equity isn’t right for every acquisition, but when the conditions align — a willing seller, a buyer who values alignment, and a deal where the economics benefit from reduced cash at closing — it can be a powerful tool.
If you’re exploring a business acquisition and want to understand whether rollover equity makes sense for your situation, we’re here to help.
Contact GoSBA today for a free consultation — we’ll help you evaluate your deal structure options, navigate SBA requirements, and find the right lender for your acquisition. No cost, no obligation — just expert guidance from a team that’s closed $320M+ in SBA loans in 2025.
