For many business owners, selling a stake to a private equity (PE) firm can feel unfamiliar. It’s worth clearing up one common misconception early on: a PE deal doesn’t have to be an “all or nothing” decision.
You can take money off the table while retaining a meaningful stake in the business. That means realising some of the value you’ve built over the years, while staying invested for the next phase of growth and a potential second windfall further down the line. Provided there is a management team to work alongside PE going forward, it is also possible for some shareholders to cash out in full.
Bringing in a PE investor also doesn’t mean the management team has to hand over day-to-day control. PE firms invest in businesses they believe in and back the management team to deliver the growth ambition, providing strategic oversight and valuable support along the way.
So how are these deals typically put together? Below, we break down the key components of a typical PE deal structure and how they work together to align interests and share risk and reward.
Vendor reinvestment
Vendor reinvestment, often referred to as an equity rollover, means reinvesting a part of your sale proceeds back into the business, alongside the PE investor. Rather than selling 100% of your shares for cash, you might sell c.50% and roll the remaining c.50% into the new capital structure.
Rollover equity is standard in PE transactions. For founders, the appeal is clear. You derisk your personal position by extracting a significant amount of value as cash while continuing to retain a meaningful stake in your business. If the business grows under PE ownership and is sold again at a higher valuation, that retained equity can deliver a second liquidity event.
From the investor’s perspective, this shared exposure to risk and reward matters. Reinvesting demonstrates your confidence in the business and keeps incentives aligned. When management has capital at risk, everyone is focused on the same outcome: long‑term value creation.
Third-party debt
Most PE deals use some form of external debt alongside equity. Rather than funding the entire purchase price themselves, the PE investor will often part-fund the transaction with third-party debt finance, typically from a bank or credit fund. For example, it might invest 50% equity and borrow the remaining 50%, with the debt being serviced by the company’s cash generation.
This approach amplifies returns if the business performs well. The principle is similar to using a mortgage when buying a property: with less equity invested upfront, growth in the value of the underlying asset can translate into a higher return on equity.
In the mid‑market, it’s common for businesses to take on debt equivalent to around two to four times EBITDA to support a PE transaction. That level of leverage benefits both the PE firm and rollover shareholders, provided it’s structured sensibly.
Debt does, of course, introduce risk. Interest and repayments must be serviced from the company’s cash flow and covenants need to be met. As a result, PE firms are careful to set debt levels the business can comfortably support.
You can take money off the table while retaining a meaningful stake in the business.
Shareholder loan notes
For PE deals, it is rare for the equity investment to be made entirely in ordinary shares. Instead, most of the capital from both the PE firm and the rollover shareholders is structured as shareholder loan notes.
Loan notes sit between debt and equity in the capital structure and typically carry a fixed interest rate, often in the region of 8–12% per annum. Rather than being paid in cash, this interest usually accrues and is settled on exit.
Their value becomes most obvious when the business is sold. Loan notes are repaid ahead of ordinary equity, meaning the principal and accrued interest are returned before the remaining proceeds are split.
This gives both investing parties a level of downside protection. If the exit valuation is lower than expected, loan notes help preserve value by ensuring the first tranche of proceeds is returned to the original investors (i.e. you as reinvesting shareholder and the PE firm) before the ordinary equity holders (including the sweet equity holders) share in what’s left. For that reason, they are a common feature of PE deal structuring.
Sweet equity
In a typical PE deal, a portion of the equity is reserved for the management team in the form of “sweet equity”. This is a relatively low-cost investment that sits at the back of the capital structure, ranking behind the third-party debt and shareholder loan notes.
As a result, it usually has little immediate value on day one, which makes it affordable for new management shareholders and helps to avoid immediate undesirable tax charges for them. If the business does not grow, it may never deliver a return. However, if the company performs strongly and is sold at a higher valuation, the upside can be significant relative to the initial investment.
Once debt and loan notes have been repaid, remaining value flows to ordinary equity holders, including those holding sweet equity. This structure is intentionally designed to incentivise the management team to drive growth and reward successful value creation.
For owner‑managers staying in the business, sweet equity provides additional exposure to the next phase of growth. It’s also an effective way to attract and retain key individuals by giving them a genuine stake in the outcome.
When management has capital at risk, everyone is focused on the same outcome: long-term value creation.
A balanced deal aligning interests
PE investment is not simply a cash transaction. It’s the start of a partnership that is carefully structured to balance risk and reward between you and the investor.
Rollover equity, loan notes, debt leverage and sweet equity each play a role in sharing risk and reward. The investor brings capital and value creation experience, while management brings knowledge of the business and its markets and remains responsible for driving the success of the business.
Strip away the jargon and these structures are simply tools. When used well, they create alignment, protect downside risk and ensure everyone is pulling in the same direction. With a clear understanding of how PE deals are structured, business owners can approach these conversations with confidence, knowing that the right partnership can support growth while recognising the value they’ve already built.
How we can help
Every PE deal is different, and the right structure depends on your objectives, risk appetite and plans for the business post‑transaction. With over 60% of Clearwater's deals involving PE, our team works with investors every day and advises a high volume of owner‑managed businesses on PE transactions each year, giving us a deep understanding of how funds think, invest and create value.
We support owners and management teams at every stage of the PE journey – from preparing for a first investment through to reinvestment and exit. By combining close, long‑standing relationships across the PE market with strong market insight and hands‑on transaction experience, we help clients structure deals that support growth, protect value and align them with the right long‑term partner.
AUTHOR
Kieran Virr
Director
I’m a Director in the M&A team, based in the Birmingham office. I serve our owner-managed, private equity and corporate clients with high quality, independent corporate finance advice.
I have extensive deals experience, having worked across both M&A and debt advisory since joining Clearwater in 2018. Prior to joining the business, I trained as a Chartered Accountant in the transaction services team at BDO.
Over the years, I've completed a significant number of complex transactions, such as buy-side and sell-side M&A, leveraged buyouts and fundraising for acquisitions, buy-and-build strategies, refinancings and shareholder recaps.
I'm highly motivated and passionate about finding the best solutions that meet the specific needs of our clients.
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