The Debt Behind the Deal
PE uses debt to amplify their buying power. Understanding how that debt works — and how it affects your rollover equity — is one of the most important things a seller can do before agreeing to retain any stake in a PE-backed platform.
How PE Funds Work
When a PE firm raises a fund, it collects equity capital from institutional investors. A $100 million fund doesn’t mean $100 million to spend — it means the foundation for $300 to $400 million in acquisition activity, because PE uses debt to amplify each dollar of equity.
A $100 million PE fund with a 3:1 debt ratio can deploy $300 to $400 million in acquisitions. That debt sits on the balance sheets of the companies being acquired — including yours. Before equity holders see a dollar at exit, all debt must be repaid.
A Trades Deal Example
Here’s how the capital structure typically looks on a $20 million trades acquisition with a rollover:
PE equity: $5M (25%) · Acquisition debt: $15M (75%) · Of which seller rollover: $5M · Total: $20M
The seller receives $15 million in cash and rolls $5 million into the platform. The company simultaneously takes on $15 million in debt that must be serviced from the business’s cash flow.
What This Means for You as a Seller
Look at that structure from the seller’s side of the table. You walk away with $15 million in cash — but the business you built now carries $15 million in debt, and $5 million of your money is still riding on how it performs. That changes the risk picture in several ways.
A level of debt your business has never carried. Most trades owners built their companies conservatively: a line of credit, some truck and equipment loans, perhaps an SBA loan at the start. Few have ever run a business carrying debt that can be north of four times annual earnings. At today’s interest rates, $15 million of acquisition debt can mean well over $1 million a year in interest alone, before a dollar of principal is repaid. That payment comes out of the same cash flow that used to fund your trucks, your bonuses, and your distributions.
Why PE is so focused on cash flow. This is why private equity has a reputation for scrutinizing every line of the P&L — pricing, labor efficiency, overhead, collections, capital spending. It isn’t only about growth. The debt payments are due every quarter whether it was a mild summer or a record one, and generating predictable cash flow is how they get made.
When cash flow falls short. Acquisition loans come with covenants — financial tests, such as maximum debt relative to earnings, that the company must meet every quarter. Miss them and the consequences escalate: waiver fees, higher interest rates, restrictions on spending, or a requirement that the sponsor inject more equity, which can dilute your stake. In an extreme case, a lender can take control of the business or force a sale on its terms.
Operational change adds risk. PE ownership almost always brings change — new software, new pricing, consolidated dispatch or back office, different compensation plans. Done well, these changes improve the business. But during the transition, profitability can dip and key technicians or managers may leave. A temporary dip that would be a nuisance in a debt-free company becomes a real problem when a large fixed payment is due regardless.
Why it all matters to your rollover equity. When the platform is sold, the debt is repaid first and equity holders split what remains. Leverage magnifies the result in both directions. Using our example: if the business grows, pays debt down to $10 million, and sells for $30 million, the equity is worth $20 million — four times its starting value. But if the business stumbles and sells for $18 million with the full $15 million still owed, the equity is worth just $3 million — a 40% loss on a 10% decline in company value. If the sponsor miscalculated the business’s ability to carry its debt, rollover holders feel it first.
The Platform Debt Stack
The picture gets more complex at the platform level. If the PE sponsor already owns several businesses with $50 million in existing debt, and your transaction adds $15 million more, the combined platform is now carrying $65 million — before any future acquisitions.
And platforms rarely stop there. The buy-and-build model typically funds each new add-on with more borrowing, so by exit the platform may be carrying far more debt than it had on the day you closed. The thesis is that each acquisition brings enough earnings to more than cover its own debt — and when businesses are bought at lower multiples and the larger platform is sold at a higher one, that gap is where equity returns come from.
The catch is that your rollover no longer depends on your company alone. It depends on the whole platform: acquisitions you didn’t choose, integrations you don’t control, and debt taken on to buy someone else’s business. Your branch could hit every target and your equity could still suffer.
In the worst case, the math produces a goose egg. Suppose the platform carries $65 million of debt at exit and sells for $60 million. Lenders are repaid first, and there is nothing left for equity holders. Your rollover is worth zero — even though the business you built may still be running just fine.
This doesn’t mean the buyer is financially unsound. But it does mean your rollover equity sits inside a capital structure where all of that debt must be satisfied before any equity value is distributed at exit. Exactly where you sit in that line — behind senior lenders, any subordinated debt, and often preferred equity — is called the capital stack, and it’s the subject of our next article.