Rollover Equity in a Windsor Daycare Sale: The Real Trade-Offs

The situation

Anh spent fifteen years building a small group of early learning centres in Windsor, starting as an early childhood educator running a single home-based program before opening a second location, then a third. Ji-ho, an administrative assistant by training, took over the books, payroll and licensing paperwork as the group grew. Neither of them came from a business background. Their household income had stayed modest through most of those years — the money was in the business, not their pockets, and most years they paid themselves less than their staff.

By the time a regional consolidator came calling, the group had grown into something worth acquiring: several licensed locations, stable enrolment, and a reputation that took over a decade to build. The buyer was backed by a private equity sponsor and had already rolled up a handful of similar operators across southwestern Ontario. Its acquisitions lead, Min-ji, made an offer that valued the group at a figure in the low eight-figure range — enough to change Anh and Ji-ho's lives, if the deal held together the way it was pitched.

The offer wasn't all cash. A meaningful slice of the purchase price was structured as rollover equity — shares in the buyer's holding company instead of money in the bank. Min-ji framed it as a chance to keep a stake in something bigger, to benefit again when the platform eventually sold or went public. Anh and Ji-ho came to Treadstone Law before signing anything, term sheet in hand, wanting to know what they were actually agreeing to.

What the term sheet didn't say

Rollover equity is common in private equity-backed acquisitions. Instead of taking the full purchase price in cash, the seller reinvests a portion of it into shares of the buyer's company, or a new holding company created to own the combined business going forward. Buyers like it because it keeps the founder financially invested in a smooth transition and reduces the cash they need up front. Sellers are told it lets them participate in the next round of growth. Both of those things can be true. What the pitch usually leaves out is how differently the cash and the equity behave if things go wrong.

Our review of the term sheet found three problems, none of them unusual for this kind of deal, all of them serious for a couple whose net worth was about to become concentrated in a single illiquid asset.

First, the rollover shares carried no liquidation preference. In a sale of the buyer's company or a wind-down, the private equity sponsor's preferred shares would be paid out in full before Anh and Ji-ho's rollover shares saw a dollar. If the platform's value ever fell below what the sponsor had put in, the rollover equity could be worth nothing even while the underlying business still had value.

Second, the shares came with a drag-along provision but no matching protection. A drag-along lets majority shareholders force minority holders to sell on the same terms when the majority decides to exit — standard in principle, but this version gave the sponsor unilateral control over both the timing and the price of any future sale, with no minimum return set for the rollover holders.

Third, there were no ongoing information rights. Once the deal closed, Anh and Ji-ho would have no contractual right to see how the platform was actually performing — no financial statements, no board updates, nothing beyond whatever the sponsor chose to share. They would be holding a meaningful piece of their net worth in a company they couldn't see inside.

None of this made the deal a bad one to do. It made it a deal where the rollover portion carried real, largely unpriced risk that the term sheet's language of “growth participation” did not disclose.

What we did

1. Modelled the downside, not just the upside. We asked Anh and Ji-ho how much of the total price they could afford to lose entirely, given their income history and what they needed the sale to fund. That number, not the sponsor's growth projections, became the ceiling for how much rollover exposure made sense.
2. Pushed to shrink the rollover percentage. The initial term sheet had rollover equity making up close to forty percent of total consideration. We negotiated that down to roughly twenty percent, moving the difference into cash paid at closing — money that couldn't be eroded by the platform's later performance.
3. Negotiated a liquidation preference for the rollover shares. We could not get parity with the sponsor's preferred shares, but we secured a position ahead of the platform's common equity, so a future sale at a reduced valuation wouldn't automatically wipe out the rollover stake before common holders felt any pain.
4. Added information rights. The final agreement gave Anh and Ji-ho the right to receive annual financial statements and to be notified of any sale process involving the platform, so they would not be blindsided by a transaction they had no visibility into.
5. Negotiated a limited redemption right. We secured a provision letting Anh and Ji-ho require the company to buy back a portion of their rollover shares after a set number of years at a formula tied to the business's audited financials, giving them a path to partial liquidity even if the sponsor never pursued a sale.
6. Explained the trade-off plainly before closing. None of these protections turned the rollover equity into cash. We were clear with Anh and Ji-ho that they were still taking on real risk in exchange for a shot at additional upside, and that the smaller rollover percentage meant a smaller potential gain as well as a smaller potential loss.

The outcome

The sale closed with roughly $8.5M in cash paid at closing and a rollover equity stake valued at about $1.8M at the time of the deal, against a total transaction value in the low-to-mid eight-figure range once earn-out and adjustment provisions were factored in. Anh and Ji-ho used the cash to pay off debt tied to their centres, invest for retirement, and buy time to figure out what came next.

About twenty months later, the platform ran into trouble. Two of the sponsor's other acquired operators underperformed badly, and the group as a whole took on financial strain that pushed a later financing round through at a valuation well below where Anh and Ji-ho's shares had been marked at closing. Under the original term sheet, with no liquidation preference and no information rights, they likely would have found out only when their shares were diluted or wiped out entirely, with no warning and no leverage to respond.

Because of the protections negotiated into the final agreement, the outcome was different, though not painless. The liquidation preference meant their shares retained value ahead of the platform's common equity even as the overall valuation fell. Their rollover stake, once worth roughly $1.8M, was written down to somewhere in the range of $700,000 to $900,000 depending on how the next valuation event ultimately settled — a real loss, and one Anh and Ji-ho felt. But it was a fraction of what they stood to lose under the original terms, and their information rights meant they saw the trouble coming well before it became public, giving them time to plan around it rather than being caught by surprise.

This is not a story about a deal that went perfectly. It is a story about a deal that went imperfectly in a way the clients were prepared for, because the risk had been priced and limited in advance instead of discovered after the fact.

What you can learn from this