Big Story

You Kept 20%. Here's What the Sponsor Assumes About Your Second Bite

Key Takeaways

• In the first three quarters of 2025, seller rollover was observed in 68.3% of the platform deals GF Data tracked. The average rollover was 14.8% of transaction value.
  

• In a $10 million sale, an owner who takes $8 million in cash and rolls $2 million could own about 44% of the new company. The percentage is higher than 20% because lenders fund much of the purchase.
  

• In First Turn Capital’s example, that $2 million rollover is worth about $3.3 million after five years if earnings stay flat and debt is repaid. A 30% decline in earnings leaves it worth about $1.8 million.
  

• With flat earnings, the sponsor earns about 11% a year on its $2.5 million investment, below its target of around 20% or more. The owner can make money on the rollover even when the sponsor misses its target.

When an owner rolls part of the sale price, both the owner and the sponsor have money invested in the business. The sponsor, however, has a return target that may depend on substantial growth. The owner’s stake could gain value even if the sponsor misses that target. Before counting on a large second payout, the owner needs to understand how much growth the sponsor’s projections assume.

Rollover has become a common part of platform acquisitions. GF Data’s analysis found seller rollover in 68.3% of the platform deals it tracked through the third quarter of 2025, averaging 14.8% of transaction value. The comparable figures in its earlier 2024 report were 63.6% and 14.5% across the deals tracked that year.

A worked example from First Turn Capital shows what this means for a seller. In a $10 million sale, lenders provide $5.5 million, the sponsor invests $2.5 million, and the owner takes $8 million in cash while rolling $2 million into the new company. The owner’s $2 million represents about 44% of the new company’s $4.5 million in equity. The sponsor owns about 56% and controls the board. The business must generate enough cash to repay the acquisition debt.

The sponsor judges the deal by what its $2.5 million investment will return at the next sale. First Turn describes a target of around 20% a year or more. Doubling an investment over five years returns about 15% annually. Tripling it returns about 25%. To meet its target, the sponsor needs both growth and debt repayment.

First Turn models a sale five years later, after the debt falls from $5.5 million to $2.5 million. If earnings fall 30%, the owner’s stake is worth about $1.8 million, less than the $2 million rolled at closing. If earnings remain flat, debt repayment would lift the stake’s value to about $3.3 million. If earnings double, it is worth about $7.8 million.

With flat earnings, the sponsor’s $2.5 million grows to about $4.2 million, an annual return near 11%. If earnings double, they grow to about $9.7 million, or roughly 31% per year. The owner makes money in the flat earnings case, while the sponsor falls short of its target. That gap helps explain why a sponsor may pursue acquisitions or other growth plans that the owner would not have counted on when assessing the rollover.

These figures assume both parties hold the same class of equity, with no management incentive pool or new shares. Deal terms can change the owner’s payout. Preferred equity may be paid to the sponsor first. New shares issued to managers or to fund acquisitions can reduce the owner’s percentage of ownership.

Before signing a letter of intent, ask the sponsor to show what your rollover would pay if earnings stay flat or fall 30%. The model should include all shares that could be issued, the management incentive pool, and any preferred return. Check whether your rollover has the same rights as the sponsor’s investment.

Governance Feed

1. BDO surveyed 400 U.S. private equity professionals and found that 82% expect deal prices to rise over the next 12 months. 41% named private credit as their primary funding source, while 48% said finding and retaining the right people is their biggest barrier to executing deals quickly. For sellers, a management team that can stay on and run the business may matter as much as earnings when buyers assess an acquisition.
   

2. Axial found that among businesses with $1 million to $2 million in EBITDA, the median sale multiple was 3.51 times for deals that drew 1 to 20 buyer pursuits and 5.03 times for deals that drew at least 41 buyer pursuits. Across all the closed deals it examined, the corresponding medians were 4.07 and 5.21 times. Stronger businesses may attract both more buyers and higher offers, so the figures do not show that adding buyers alone raises the sale price.
   

3. KBRA’s September update tracked 2,948 sponsored middle-market borrowers and found that its rolling default monitor rose to 3.5% from 3.4% in the previous monthly observation. The three-month surveillance downgrade rate rose to 13.9% from 12.2%, while median gross leverage reached 6.5 times. Buyers using substantial debt may have less flexibility if a target’s cash flow falls short of projections.

Thesis Principle

An indemnification basket sets the threshold a buyer’s post-closing claims must reach before the seller pays. In deals under $10 million, that threshold is typically 0.5% to 1% of the purchase price. With a deductible basket, the seller pays only claims above the threshold. With a tipping basket, crossing the threshold makes the seller liable from the first dollar. On a $5 million sale with a 1% basket, a $60,000 claim would cost the seller $10,000 under a deductible basket and $60,000 under a tipping basket. Fraud claims are generally treated separately, without a basket or time limit and with liability capped at the purchase price.

Resources & Events

📅 Lower Middle Market Panel & Reception (Dallas, TX - October 6, 2026)

The Small Business Investor Alliance will host a lower-middle-market panel and networking reception at Old Parkland in Dallas. The discussion examines why more investors are backing individual acquisitions through independent sponsors, what distinguishes successful sponsors, and how family offices and funds assess these deals. Panelists will also discuss findings from two recent independent sponsor studies. A networking reception follows the panel. Attendance is limited to lower-middle-market fund managers, investors, family offices, independent sponsors, and investment banks.

📅 The Osborne ETA Symposium (Cleveland, OH - October 28, 2026)

The Osborne ETA Symposium takes place at Case Western Reserve University. Hosted by the university’s Weatherhead ETA Center and Promise Partners, the event is for people considering the purchase of an existing business, buyers already searching for one, and owners working through the demands of operating a company. Investors, lenders, and advisors will also attend. The program covers finding businesses to buy, evaluating their finances and operations, arranging financing, and managing the transition.

📊 Report Spotlight: Middle Market Business Owners Survey (Capstone Partners)

Capstone Partners’ September 2026 survey of roughly 400 privately held U.S. middle-market business owners found that 72.7% of middle-market CEOs had started preparing for an exit. Businesses that had begun preparing reported 46.5% more capital-markets transactions, 34.5% greater inbound private-equity interest, and 20% greater LTM revenue growth than businesses that had not started preparing. 79.4% of owners who had started preparing felt confident their business would remain successful one year after their departure, compared with 60.6% among owners who had not prepared.

For the Commute

He Sold 40% of His Company but Never Gave Up Control (The Turn Podcast)

Bret Biggart discusses how he took a solar business from zero to roughly $300 million in revenue, eventually selling a 40% stake to two private-equity firms while retaining control. Biggart describes bringing in outside capital not only for liquidity, but also to introduce new perspectives, more disciplined reporting, regular forecasting, and greater reliance on data in decision-making. For owners considering outside capital while retaining control, the episode shows how a minority investment can change how a company is governed and run, beyond simply giving the owner a chance to take money off the table.