What is an equity roll, and how does it work for Canadian sellers?
As a Canadian business owner preparing to sell, you may encounter the term "equity roll" in negotiations, especially with private equity firms or strategic buyers. An equity roll (or rollover) is a structure where the seller retains part of their ownership by rolling some equity into the new ownership structure after the sale, keeping a stake in future success while receiving immediate liquidity. The goal is to align seller and buyer interests and offer a potential "second bite of the apple" if the company grows or is sold again.
Common forms of an equity roll
1. Equity in the acquiring company (Topco or Holdco) — roll equity into the buyer's holding or parent company (e.g., sell 80% for $10M and roll 20%/$2M into the acquirer); upside if it sells again higher, but your equity is tied to the acquirer's performance and debt, with limited control
2. Equity in the operating company — keep a direct minority stake (e.g., sell 70%, retain 30%) in the same entity; closely aligned with performance but less liquid, with governance set by the shareholders' agreement
3. Preferred or structured equity — receive preferred shares with priority dividends, liquidation preferences or fixed returns; lower risk but capped upside and complex terms like redemption and conversion rights
4. Earnout-linked equity — the value of retained equity depends on hitting post-sale performance milestones; it aligns incentives but risks reduction or forfeiture if the business underperforms
5. Partnership or joint venture — roll equity into a partnership or JV with the buyer (e.g., sell 60%, roll 40%); collaborative and flexible but complex to govern, and flow-through for Canadian tax
Key considerations — ensure a fair valuation of the rolled equity, clarify control and governance (drag-along and tag-along rights), and understand the tax implications: a properly structured Section 85 rollover (filing form T2057) can defer capital gains tax, and the Lifetime Capital Gains Exemption may apply for a qualified small business corporation. Also weigh liquidity and exit options (put or redemption rights), risk and reward, and engage experienced legal and financial advisors.
Key facts: equity rolls for Canadian sellers
An equity roll lets a seller reinvest part of their proceeds into the post-sale structure for future upside
Five forms: acquirer (Topco/Holdco) equity, operating-company equity, preferred/structured equity, earnout-linked equity, partnership/JV
A Section 85 rollover (form T2057) can defer capital gains tax; the LCGE may apply for a QSBC
Weigh valuation, governance, liquidity, put/redemption rights and risk with legal and tax advisors
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.
