Sell part. Keep a stake.
How a private equity recap really works
Sell control now, keep a stake, and understand what could happen to it.
A plain guide for owners of service businesses with $5M+ in annual revenue, including the parts a buyer may not volunteer.
- First close. You sell control of the company and receive cash at close.
- A possible second sale. Your retained stake may pay more, less or nothing.
- Your rolled stake. The part of your value that rides from the first close to the second sale. It is illiquid: you usually cannot sell it on your own.
Caution
Retained ownership and future upside are possibilities, not promised second paydays. Rolled or retained equity is usually illiquid, often a minority position behind acquisition debt, and can lose some or all of its value.
Chapter 1 of 7
What a recap is
A recapitalization changes the mix of debt and equity that owns and funds a company. For an owner, it usually means selling part of the company, often with new debt put on it. [1]
There are two kinds, and the difference is who ends up in charge.
Before
Majority recap
Minority recap
- Majority recap
- You sell control, usually to a private equity group, and keep a minority stake. The piece you keep is called rollover equity, because part of your sale value rolls into the new ownership group instead of being paid in cash. Benchmark International calls this an "elevator deal." [2] [3]
- Minority recap
You sell less than half and keep control. Main Street Capital describes it as the sale of 1% to 49% of a company. Typical, varies [4]
We do not arrange minority investments or growth-capital raises; if one may fit, we can refer you to a registered broker-dealer.
In a majority recap the buyer gains control. You keep negotiated rights, not control: your role, your seat and your protections are written into the deal, or they do not exist.
The buyer usually borrows part of the price, and the company carries that loan. That is the acquisition debt the caution boxes on this page refer to.
Your rolled stake is a security issued by the buyer's company, with its own risks. Before you are bound, you should receive the buyer's financial statements for its last fiscal year, a balance sheet no more than 120 days old, and information about its management, its operations and any material loss contingencies.
Where we fit
We work on control transactions: a full sale, or a majority recap in which a buyer acquires a controlling interest and takes an active role in running the business, while you keep a stake. We introduce qualified buyers, including private equity groups, family offices and strategic acquirers. We advise; we do not invest.
Caution
Retained ownership and future upside are possibilities, not promised second paydays. Rolled or retained equity is usually illiquid, often a minority position behind acquisition debt, and can lose some or all of its value.
Chapter 2 of 7
The price, taken apart
A headline price is not one number paid on one day. Here is one price taken apart: every piece, and when it reaches you.
Hypothetical illustration. Round index numbers (headline price = 100), chosen for easy reading; real terms vary. Not a client result, a prediction or a valuation. Fees, taxes, debt and dilution are ignored in the math.
Text version: the parts list below.
| Part | Index | When it reaches you |
|---|---|---|
| Part 1Cash at close | 60 | At close |
| Part 2Holdback or escrow | 10 | Later, if there are no claims |
| Part 3Possible earnout | 10 | Over time, only if targets are hit |
| Part 4Rolled equity | 20 | Only at a later sale, if it pays |
| Part 5Debt on the company | Outside the 100 | Not paid to you |
| Parts 1 to 4 | 100 | Paid at close: 60, before fees, taxes and any price adjustments. The other 40 depends on claims, targets and a later sale. |
What each part is
- 1 Cash at close
- Paid when the deal closes. The buyer usually funds part of it with debt the company takes on (part 5).
- 2 Holdback or escrow
- Held back to cover the promises you make in the purchase agreement. Released later if there are no claims, reduced if there are.
- 3 Possible earnout
- Paid only if the business hits agreed targets after closing. Can be zero.
- 4 Rolled equity
- Value you leave in as a stake in the new company instead of taking cash.
- 5 Debt on the company
- The buyer usually borrows part of the price, and the company carries the loan. It is repaid before your stake.
What could happen to part 4, your rolled stake
Hypothetical illustration. Your 20 is 20% of a company valued at 100. Four ways the second sale could go. Not a prediction; the cases are not equally likely, and no one can tell you in advance which one you will get. Fees, taxes, debt and dilution are ignored.
| Case | Company sells for | Your 20% is worth |
|---|---|---|
| Better | 150 | 30 |
| Flat (as rolled) | 100 | 20 |
| Lower | 50 | 10 |
| Zero | Fails, or sells for less than it owes | 0 |
With debt on the company, a lower sale hits your stake harder than this table shows: the loan is repaid first.
In a real deal, debt, fees and any preferred equity are paid before your stake. That is why a flat or lower sale can leave you with less than the table shows, or nothing. One sell-side newsletter calls the second bite "a bet." [1]
Caution
Retained ownership and future upside are possibilities, not promised second paydays. Rolled or retained equity is usually illiquid, often a minority position behind acquisition debt, and can lose some or all of its value.
How big is a rolled stake? Typical, varies
Usually 10% to 30%, and often higher for founders who stay; some advisors cite 10% to 40%. How the percentage is measured also varies: a share of your proceeds, or a share of the new company. Ask which one a buyer means. [2] [3] [4]
Sources for this chapter
Chapter 3 of 7
Your rolled stake
Your rolled stake is a minority position in a company someone else controls. A handful of terms decide what it is really worth to you, and most of them are settled before closing.
Money from the second sale flows in here, and fills each level in order
- Lenders. The debt on the company is repaid first.
- Fees and preferred equity, if any. Transaction fees, then preferred equity: shares that are paid back before ordinary shares.
- Common equity (ordinary shares), including your stake. Paid from whatever is left.
Equity class
Your stake may be common equity while the buyer holds preferred equity that is paid first. Same company, different place in the line.
Board seat
Rollover owners may get a board seat or observer rights (you attend meetings but do not vote), depending on the size of their stake. A continuing CEO often has a seat. Typical, varies [1]
Drag-along and tag-along
A drag-along lets the controlling owner make you sell on the same terms when it sells. A tag-along lets you join a sale on the same terms.
Repurchase if you leave
"Most rollover equity is subject to repurchase rights upon termination of employment." If you leave, or are let go, the company can often buy your stake back on a formula. Typical, varies [1]
Your role
Your role after closing is negotiated: stay as CEO, move to the board, or step back. Pay, title and reporting lines are part of that negotiation.
Ask What exactly will I run, and who will I report to?
Each of these is on the chapter 7 checklist.
Caution
Retained ownership and future upside are possibilities, not promised second paydays. Rolled or retained equity is usually illiquid, often a minority position behind acquisition debt, and can lose some or all of its value.
Source for this chapter
Chapter 4 of 7
The second sale
A private equity owner plans to sell the company again. When it does, your stake is usually sold too. People call that the "second bite of the apple": a possible second sale of your retained stake, often years later. It can be worth more, less or nothing. Typical, varies [1]
How long until the second sale? Typical, varies
Advisors often say three to six years. A study of 13,757 exits from 2021 to mid-2026 put the typical hold at 6.0 years, and holds have been getting longer. Nobody can promise you a date. [2] [3]
Can you say no to the second sale?
Often not. If your agreement has a drag-along, the controlling owner can require you to sell on the same terms. The next buyer could be another investor or a company in your industry, and you may not get to choose. Read the drag-along before you commit.
The risks, stated plainly
- Your stake is illiquid: you usually cannot sell it until the company is sold.
- It is usually a minority position behind acquisition debt.
- No second payday is promised. Your stake can lose some or all of its value.
- The way the company is run can change: new processes, new targets, new reporting. One contractor said after closing, "I felt like they left me out here on an island." [4]
Caution
Retained ownership and future upside are possibilities, not promised second paydays. Rolled or retained equity is usually illiquid, often a minority position behind acquisition debt, and can lose some or all of its value.
Sources for this chapter
Chapter 5 of 7
Earnouts and holdbacks
Two parts of the price arrive late, if they arrive at all. Both are negotiated, and both are easier to protect before closing than after.
Earnout
Part of the price is paid later, only if the business hits agreed targets after closing. One law firm describes it as "contingent additional purchase price based on the company's post-closing performance." The period is generally two to five years. Typical, varies [1]
Protect Define the targets and the accounting precisely. Ask who controls the decisions that move the targets, and what happens if the buyer sells, merges or changes the business before the period ends.
Holdback or escrow
Part of the price is held back at closing to cover the promises you make in the purchase agreement. One study cited by Schwabe found an average of 9.14% and a median of 7.5% of the price, in 2014 data. Dated; typical, varies [1]
Protect Ask when each part is released, how a claim is made and disputed, and whether claims are capped.
Caution
An earnout is a possibility, not part of the price you can count on. If the targets are missed, it pays nothing.
Source for this chapter
Chapter 6 of 7
Taxes: your CPA decides
Tax treatment depends on deal structure and your situation. Your CPA or tax attorney decides.
What we can say in general: some structures may defer tax on the rolled portion, and some do not. Cash and other property you receive are generally taxable. Earnout and holdback payments raise their own timing questions. None of this tells you how it applies to you.
Six questions for your CPA
- What type of entity is the company: C corporation, S corporation, LLC or partnership?
- Is this a sale of assets or a sale of shares or membership interests?
- How is the rollover structured, and which parts could be taxed now?
- When do earnout and holdback payments count as income?
- Which state taxes apply, where you live and where the company operates?
- How does the deal fit your estate plan?
Note
Nothing on this site is tax, legal, accounting or investment advice. Talk to your CPA and attorney.
Chapter 7 of 7
Questions to ask any buyer
Bring this list to every first meeting. A buyer who answers clearly, in writing, is telling you something. So is one who will not.
Tick them off as you go. Nothing you tick is saved or sent.
0 of 12 asked
Adapted, in our own words, from a seller's checklist in LeverUp, "The second bite" (opens a new tab).
Is a recap right for you?
Find the line that sounds like you.
It may fit
- You want to take money off the table and keep working in the business.
- A majority recap is designed for that trade: cash now, a minority stake, a negotiated role. Ask how one would work for your company.
- You are open to a partner controlling the board and the budget.
- That is the trade a majority recap asks for. Your role and protections are negotiated.
- Your company has $5M+ in annual revenue, ideally $1M+ in earnings ($500K+ is considered).
- Not sure of your figures? That is fine. Unknown numbers are not an automatic no; we review fit with you.
Caution
Retained ownership and future upside are possibilities, not promised second paydays. Rolled or retained equity is usually illiquid, often a minority position behind acquisition debt, and can lose some or all of its value.
Not yet, and what to do instead
- You want to keep control.
- A majority recap is not for you. A minority investment usually leaves control with you. We do not arrange minority investments or growth-capital raises; if one may fit, we can refer you to a registered broker-dealer.
- You want to step away within a year or two.
- A full sale may fit better. Repurchase terms and earnouts tie a rolled stake to your staying. We work on full sales too.
- Your books are not ready, or the company cannot run without you.
Prepare first. You would not be alone: in one owner survey, only 27% had had a formal valuation. Survey, self-selected; varies
- You are not sure you want to sell anything.
Keeping the company and waiting is a real option. Lay it next to the others at recapoptions.com.
Every buyer is qualified before they ever see your name.
Before a buyer signs an NDA, they go through several screening steps covering who they are, their capacity to close, and how well your business fits what they are looking for. Only buyers who clear every step are introduced.
Interest is not the hard part. Our listing network draws hundreds of blind inquiries beyond our own outreach, and our blind teasers are viewed thousands of times. That outreach reaches a network of more than 100,000 buyers, and it grows every day. Qualification is how we turn that volume into a short list worth your time.
-
Screening, before any NDA
- Who they are
- Their capacity to close
- How well your business fits what they want
-
NDA
Only a buyer who clears every step is asked to sign one.
-
Introduction
Your name and identifying details are shared only with your authorization.
Ask how a recap would work
Tell us about the company. We will explain how a recap would work for you, or say plainly if it would not.
Thank you. Your request is in.
What happens next:
- We read your answers and check whether a recap could fit.
- We reply by email within one business day. If a call would help, you can ask for one when we reply.
- Nothing about your company goes to any buyer without an NDA and your authorization.
Submitting does not commit you to anything. To add something, email info@exitstrategies.com.
- Who you will hear from
- An advisor. We do not invest in your company. We work on control transactions and introduce qualified buyers, including private equity groups, family offices and strategic acquirers.
- Confidential
- We handle inquiries discreetly and share identifying details with buyers only after they sign an NDA and you authorize it.
- After you send it
- We review your answers and reply by email within one business day. If a call would help, you can ask for one when we reply.
- Cost
- The first conversation costs nothing. If you engage us, fees are set in writing before any work starts.
100% US-based. A real person, any hour.
We use AI behind the scenes for internal work and buyer matching, but people run every client relationship. Our principals take shifts so one of us is always reachable, day or night, and anything you send is routed right away.
Two related guides
- recapoptions.comCompare a full sale, a majority recap and the other options side by side, including keeping the company.
- newbizpartner.comWhat a partner usually takes, and what you can keep.
Longer reads: articles on the second sale, earnouts and holdbacks.
Guides by state
State rules and taxes for owners in five states. See all state guides.