When the cheque at close gets smaller: rollover equity is displacing the earnout in sponsor-led Australian tech deals

The way Australian sponsor-led mid-market technology deals are structured is changing, which has big implications for founders planning an exit. Mid market deal volumes have been fine overall, and over the last year, ~300 deals were completed across Australia at a total value of ~A$20.9b, much of that sponsor led. However, there’s been a shift in how the consideration is structured, with cash at close giving ground to a mix of cash, rollover equity, minority stakes and scrip in the acquirer.

The idea of contingent consideration isn’t new for sellers, but a rollover isn’t just an earn-out by another name, and the risk and control profile is different. An earnout is contingent consideration paid later if the business hits agreed milestones. An equity rollover is sale proceeds reinvested into the buyer or a new holding company, so the founder keeps a shareholding rather than waiting on a deferred cheque.

For most of the last cycle the earnout was the default bridge across a valuation gap, but that is changing, particularly in sponsor-led deals. Where a founder’s expectation sits above a disciplined buyer’s number, rollover equity is now a reasonably common means of bridging the gap. There are a few key reasons why this is becoming more common:

1. Private equity sponsors are holding substantial dry powder and pursuing platform and bolt-on acquisitions in software and IT services. They want founders retained and aligned to drive value in the businesses, not paid out and gone.
2. An earnout puts all the contingent value on metrics the buyer controls after completion. The earnouts that turn sour are usually the ones tied to margin or new-product revenue, the lines a buyer reshapes the week after signing.
3. Rollover keeps the founder on the sponsor’s equity upside. If the investment thesis works over their hold period, the retained stake at the second exit can outweigh the cash given up at the first.

So a headline enterprise value now tells a founder less than it used to about what they will receive, and when. Underneath what a “good deal” looks like depends heavily on your risk appetite as a vendor, and the value you attribute to contingent amounts may have greater or lesser weighting depending on your circumstances and perspective on the future performance of the business. Cash at close, rollover, earnout and sometimes a seller note may be present in an offer, each doing a different job, and as a vendor ensuring you have clarity of what components are valuable and acceptable to you is an essential component in getting a deal done.

Before anchoring on the headline figure, a vendor should test:

1. The split between guaranteed cash at close and at-risk consideration, as a percentage of headline value.
2. Whether the rollover is into the operating business the founder knows, or into a fund or holdco vehicle whose value they cannot easily assess.
3. The terms attached to the rollover: information rights, tag-along and drag-along provisions, and the realistic path and timing to the next liquidity event.
4. For any earnout, whether the founder controls the milestones after completion, and how they are measured and disputed.

The market is still moving and still well supplied with capital, but it has also shown that it is more willing to transact through structure than through price. A prepared, well-advised founder who reads the difference between deferred cash and retained equity, and who negotiates the rollover as hard as the valuation, is the one who turns a strong headline number into money in hand.

InterFinancial advises technology founders across the deal lifecycle, from exit readiness through to structuring and execution. Owners weighing an approach, or planning a process in the next 12 to 24 months, are welcome to discuss how these structures are being applied in the current market.

If you’d like to discuss further, reach out to our Director – Technology, Telecoms and Media, Luke Harwood for a confidential conversation.