This private-equity offer is an illustrative composite. It describes no actual sponsor, accounting firm, clients, offer, or investment result. All values, debt terms, operating costs, ownership assumptions, exit proceeds, and tax reserves are invented for analysis. Professional-structure review is a separate condition rather than an assumed approval.
Rollover percentage denominator identifies whether a stated percentage refers to sale proceeds reinvested, issued ownership, voting power, or a particular distribution right.
What business and structure does this offer assume?
It assumes acquisition of a nonattest services business associated with an accounting practice. The model assigns no purchase value to attest engagements and does not assume investors may directly control a licensed attest firm.
The valuation hub provides the financial context. The alternative-practice-structure definition addresses the separation between a services company’s economic arrangements and professional responsibilities.
Related licensed practices need review of ownership, professional control, independence, contracts, and state authority; an administrative label does not resolve those issues.
The AICPA Code of Professional Conduct contains interpretations addressing alternative practice structures and related independence considerations. Its requirements and applicable state rules need to be evaluated against actual entities and relationships, rather than inferred from an investment term sheet.
How are earnings normalized before financing?
Assume reported earnings before interest, taxes, depreciation, and amortization are $900,000 after $300,000 of seller compensation. Recorded compensation is replaced with a budget for the work the buyer still needs.
| Adjustment | Amount | Running earnings |
|---|---|---|
| Reported earnings after seller compensation | Starting point | $900,000 |
| Remove recorded seller compensation | +$300,000 | $1,200,000 |
| Remove assumed supported unusual expense | +$100,000 | $1,300,000 |
| Fund replacement leadership and delivery | −$500,000 | $800,000 |
| Include incremental recurring platform charges | −$200,000 | $600,000 |
The $200,000 charge is assumed incremental and includes recurring support allocated to this business. The bridge does not also claim that the same support disappears through a synergy adjustment.
If the seller continues working, compensation for defined duties belongs in the operating budget. It is neither interest on rollover investment nor evidence that the investment will earn a return. Review the adjusted-earnings guide before accepting a sponsor’s earnings label.
How do enterprise value and seller consideration reconcile?
Assume enterprise value is $5,000,000 and existing acquisition-perimeter debt is $1,000,000. With no included surplus cash or working-capital adjustment, seller equity consideration is $4,000,000.
Twenty percent of that equity consideration is $800,000. The seller receives $3,200,000 cash and contributes the remaining $800,000 value into the new holding company. The rollover is therefore a portion of equity proceeds, not enterprise value.
The buyer separately repays the $1,000,000 old debt at closing. Cash equity consideration plus rollover plus debt payoff equals $5,000,000. Deducting the old debt again from the seller’s $3,200,000 cash would count the liability twice.
The assumed value is not an observed platform bid or evidence of lender approval.
What are the complete opening sources and uses?
Uses are $3,200,000 cash to the seller, $800,000 noncash rollover, $1,000,000 old debt payoff, $150,000 transaction costs, and $250,000 operating reserve. They total $5,400,000.
Sources are a $3,000,000 conventional bank loan, $1,600,000 sponsor cash, and $800,000 seller rollover. They also total $5,400,000. Cash sources of $4,600,000 match cash uses after excluding rollover from both sides.
The opening business has $3,000,000 of new debt. The old $1,000,000 obligation has been paid and is not also retained. The reserve is held in the operation rather than delivered to the seller.
No seller note or rollover cash coupon is assumed. Distributions require available cash and approved terms.
What ownership does the rollover buy?
Assume sponsor cash and seller rollover purchase the same class of economic equity at the same issuance basis. Total contributed equity is $2,400,000: $1,600,000 sponsor cash plus $800,000 seller value.
The seller therefore holds one-third and the sponsor two-thirds of that common economic class. Twenty percent of seller proceeds rolled over has become approximately 33.3333 percent of this particular capitalization.
This calculation does not establish voting power, governance rights, dilution protection, or professional-firm ownership. It also assumes the sponsor contributes all $1,600,000 as equity rather than partly as preferred debt or another instrument.
The rollover-equity guide explains why a percentage needs its denominator and class. Request the capitalization table, issuance price, instrument terms, and distribution waterfall instead of relying on the phrase twenty-percent rollover.
Can operating earnings carry the assumed bank loan?
The model assumes nine percent annual interest and 120 monthly payments on $3,000,000. The modeled monthly payment is approximately $38,002.73; annual service is $456,032.79 using unrounded calculations.
Normalized earnings of $600,000 leave $143,967.21 after bank payments, before taxes, reinvestment, working-capital changes, and equity distributions. This narrow residual is a funding concern to investigate, not a lender approval finding.
If recurring platform costs are $100,000 higher than assumed, earnings fall to $500,000 and the residual becomes $43,967.21. A further $50,000 qualified staffing need then produces a $6,032.79 shortfall.
A future exit value cannot pay this year’s payroll or debt. The operating company needs a credible cash plan before its owners debate possible investment appreciation.
How could an illustrative later exit distribute proceeds?
Assume a later enterprise sale value of $6,000,000, remaining debt of $2,000,000, and $200,000 selling costs. Net equity proceeds are $3,800,000 before investor taxes.
Under the same-class, pro-rata assumption, the seller’s one-third share is about $1,266,666.67. That exceeds the original $800,000 investment by $466,666.67 before tax, but it is a selected scenario rather than a predicted result.
For a separate alternative, suppose the sponsor first receives a $1,600,000 preference and remaining proceeds are shared in the same proportions. The remaining pool is $2,200,000; one-third is about $733,333.33. The seller’s result is below the original investment despite the same enterprise exit value.
The scenarios exclude intervening dilution, capital calls, and distributions. The SEC private-placement investor bulletin describes liquidity and disclosure risks of private investments; contractual restrictions deserve review before assigning rollover value to a retirement cash plan.
What current cash remains for the seller?
Assume $100,000 seller-side transaction costs are paid from $3,200,000 closing cash. Net current cash before tax is $3,100,000. A hypothetical $700,000 tax reserve leaves $2,400,000 of undesignated current cash.
The $800,000 investment stays separate. It cannot also be listed as cash available for living expenses, taxes, or another investment. No immediate sale of that position is assumed.
IRS partnership tax guidance addresses contributions, liabilities, and distributions for applicable partnership structures. This model does not conclude that rollover qualifies for tax deferral. Entity classification and actual transaction steps must support any tax treatment; the reserve is only a planning assumption.
What documents resolve the offer’s hidden variables?
Obtain documents that explain both financial rights and operating obligations. A headline purchase price and rollover percentage leave several decisive variables unidentified.
- Reconcile enterprise value, debt payoff, cash consideration, rollover value, fees, and opening liquidity.
- Review issued instruments, capitalization, voting, preferences, dilution, transfer restrictions, and exit rights.
- Validate recurring platform charges, required seller work, replacement capacity, and debt payments.
- Evaluate actual professional structures and independence relationships before attributing value to services.
- Test current seller cash and later equity scenarios separately, with transaction-specific tax advice.
What decision does this offer example support?
It supports evaluating spendable cash, required work, operating resilience, and private investment rights together. The apparent rollover percentage becomes informative only after the parties specify proceeds, classes, and capitalization.
Use the non-CPA ownership guide to identify authority questions requiring state-specific review. Financial participation should not be mistaken for permission to control professional judgments or perform regulated work.
A few common questions
What else should you know?
Does a twenty-percent rollover mean twenty-percent ownership?
Not necessarily. This example rolls twenty percent of seller equity consideration into a new company. The seller contributes $800,000 alongside $1,600,000 sponsor capital in the same assumed class, producing one-third economic ownership. Different instruments, issuance values, preferences, or contributed amounts can produce a different percentage and distribution result.
Is the later $1.27 million distribution a forecast?
No. It follows a selected exit value, debt balance, selling cost, and pro-rata waterfall. The alternative preferred waterfall yields a lower seller result using the same enterprise exit value. Actual outcomes depend on performance, financing, dilution, instrument rights, exit timing, and taxes; the model claims no observed investment return.
Can the rollover fund the seller’s closing tax obligation?
The model assumes it cannot be immediately sold or spent. The seller sets a hypothetical reserve from closing cash, separately from retained investment. Actual tax treatment of rollover requires review of the entity and transaction steps. A deferral claim should not substitute for a funded current cash plan.
Does the model approve an alternative practice structure?
No. It models a nonattest services acquisition while requiring separate professional-structure review. Applicable state ownership requirements, professional control, independence, and contractual relationships must be evaluated against actual entities and services. The new holding company’s economic capitalization does not establish licensed-firm authority or permit investors to direct professional judgments.
Which sources support this guide?
Primary rules and guidance support the factual statements in this article. The worked examples and decision frameworks are original educational analysis.
- AICPA Code of Professional Conduct — AICPA
- Private Placements under Regulation D: Updated Investor Bulletin — U.S. Securities and Exchange Commission
- Publication 541: Partnerships — Internal Revenue Service