Partial exit to PE: what you keep, what the fund takes

When a founder tells me they are doing a partial exit, they almost always describe it the same way: "I am selling part of the business and staying on to run it." That is true in spirit and misleading in the details. What you are actually signing up for is a structured financial arrangement with a preferred return, management fees, a board control transfer, and a distribution waterfall that pays the private equity fund before it pays you at the second exit. The mechanics are knowable and they are worth knowing before you sign, because they decide what your rolled equity is actually worth. This piece walks the dollar math on a representative deal: a $10M revenue direct-to-consumer (DTC) brand running 15% EBITDA margins, selling 60% to a lower middle market (LMM) PE fund.

The deal at close: what selling 60% really means in dollars

Start with the entry math, because every later number flows from it. A $10M revenue brand at a 15% EBITDA margin produces $1.5M of EBITDA. At a 5x entry multiple, that is a $7.5M enterprise value. LMM buyouts typically layer on about 3x EBITDA of senior debt, so $4.5M of the purchase is financed, leaving a $3.0M equity check. The fund writes $1.8M of that for its 60%, and you keep 40%, worth $1.2M, as rollover.

Here is the part founders skip past: the $1.8M you receive is not a bonus on top of your ownership. It is the price for the 60% you sold. Your remaining stake is now $1.2M of common equity in a company the fund controls, and it is illiquid until the fund decides to sell. A 5x entry is deliberately conservative here. Segment-wide LMM multiples average closer to 7.2x, but sub-$25M deals clear around 6.1x, and DTC-specialist buyers like DTC Equity openly target 3.0x to 5.5x because they discount channel risk. If a fund is offering you 5x on a mixed-channel DTC brand, that is a realistic mid-market number, not a lowball. If you want the fuller picture on where these numbers come from, our breakdown of how ecommerce brands are valued walks the multiple ranges by channel and scale.

When I talk to founders running a brand this size, the motivation is rarely "I want out." It is closer to derisking the family. One founder I work with, running a brand heading toward $5M revenue with about $1M of EBITDA, put it plainly: he wanted to pull some money off the table, park it in a diversified fund, and let it grow while he kept building. That is the honest case for a partial exit. The mistake is treating the rolled $1.2M as if it were cash in the bank. It is not. It is a call option on the fund executing its plan.

Stage	Item	Value	How it is derived
Entry (Year 0)	Revenue	$10.0M	Model input
Entry (Year 0)	EBITDA margin	15%	Model input
Entry (Year 0)	EBITDA	$1.50M	$10M x 15%
Entry (Year 0)	Entry multiple	5.0x	Bottom of the 5x to 9x LMM range
Entry (Year 0)	Enterprise value	$7.50M	$1.5M x 5x
Entry (Year 0)	Senior debt (3.0x EBITDA)	$4.50M	Typical LMM debt load
Entry (Year 0)	Total equity check	$3.00M	$7.5M EV less $4.5M debt
Entry (Year 0)	PE invests (60%)	$1.80M	60% of $3.0M equity
Entry (Year 0)	Founder cash at close	$1.80M	Price for the 60% sold
Entry (Year 0)	Founder rollover (40% common)	$1.20M	40% of $3.0M equity, illiquid
Exit (Year 3)	EBITDA	$2.50M	67% growth, ~18.6% CAGR
Exit (Year 3)	Exit multiple	7.0x	Mid-range for LMM
Exit (Year 3)	Enterprise value	$17.50M	$2.5M x 7x
Exit (Year 3)	Remaining senior debt	$3.00M	$4.5M less ~$0.5M/yr amortization
Exit (Year 3)	Equity proceeds	$14.50M	$17.5M EV less $3.0M debt

What the fund extracts before year 3: fees, board control, and covenants

Between the close and the exit, the PE relationship costs you three things that never show up on the cover slide. The first is management fees. LMM funds charge about 2% of committed capital during the investment period, stepping down to 1.0% to 1.5% of net asset value afterward. Preqin's 2024 vintage data pins the average buyout management fee at 1.74%, down from 1.85% the year prior, but smaller and newer LMM funds still sit at or near 2.0%. These fees are charged at the fund level, not billed to your deal directly, but they are part of the return math the fund is solving for, which is why it will push hard on growth and on your operating budget.

The second is control. Sixty percent equity comes with board majority, information rights, and approval rights over the decisions that used to be yours alone: capital expenditure above a threshold, new debt, and hiring or firing the CEO, which may be you. A PE investor I work with on a fund described the posture honestly. If the operator runs the business the way diligence said they would, the fund stays out of the way. If they do not, there are mechanisms to step in. That is the deal. Performance buys you autonomy; a miss buys you a very involved board.

The third is covenants. The senior debt that financed the deal carries financial covenants, often a minimum EBITDA coverage ratio, and those covenants can restrict distributions to you if the business dips. So the cash you rolled is subordinated not just to the fund's preferred return but, in a soft year, to the lender's comfort as well. The pattern I see again and again is founders who modeled their upside carefully and never modeled the year where a covenant blocks a distribution. Provisions vary by deal, so read yours closely.

The distribution waterfall: who gets paid, and in what order

The waterfall is where a partial exit stops being intuitive. At the second exit, the equity proceeds do not get split by ownership percentage. They flow through tiers, and each tier has to be fully satisfied before the next one fills. On our base case, the year-3 exit produces $14.5M of equity proceeds. Here is where it goes, in order.

Tier one returns the fund's $1.8M of invested capital, in full, before anyone else sees a cent. Tier two pays the fund's preferred return: 8% compounded over three years on that $1.8M, which is about $0.47M. Tier three is the GP catch-up, roughly $0.12M, which sends money to the fund manager until its share of total profit reaches its 20% carry. Only in tier four does the residual pool of about $12.1M get split 80/20, with the 80% divided between the fund and you according to equity, and the 20% going to the manager as carried interest. Your 40% of that 80% residual is where your second bite comes from: about $3.88M.

The operator takeaway is blunt: your rollover is real money if the deal clears the preferred. If it does not, your rollover is worth close to nothing, because you are last in line. The fund's downside is cushioned by three tiers of protection. Yours has none.

Tier	Mechanic	Recipient	Amount	Running total
1	Return of invested capital	PE fund (LP)	$1.80M	$1.80M
2	Preferred return: 8% compounded, 3 years	PE fund (LP)	$0.47M	$2.27M
3	GP catch-up to 20% of profit	GP (carry)	$0.12M	$2.38M
4a	Residual split (80%): fund's 60% share	PE fund (LP)	$5.82M	$8.20M
4a	Residual split (80%): founder's 40% share	Founder rollover	$3.88M	$12.08M
4b	Carried interest (20% of residual)	GP (carry)	$2.42M	$14.50M

Three scenarios for year 3: what you actually walk away with

The base case is a clean story, so it is worth stress-testing against a miss and a beat. Hold the entry constant (60% sold at 5x, $1.8M cash, $1.2M rolled) and flex only the exit.

In the bear case, EBITDA reaches $2.2M and the brand exits at 6x, a $13.2M enterprise value. With the same $3.0M remaining debt as the base case, equity proceeds are $10.2M. After the waterfall, your rollover second bite comes to roughly $2.50M. In the base case, $2.5M EBITDA at 7x produces the $3.88M we just walked. In the bull case, $2.8M EBITDA at 8x lands a $22.4M enterprise value; with the same $3.0M remaining debt ($19.4M equity), the waterfall delivers a rollover of about $5.45M. Your cash at close is the same $1.80M in all three, because that was locked at signing.

Look at what the waterfall does to the asymmetry. From base to bear, your second bite falls from $3.88M to about $2.50M, a 36% drop, while the fund's proceeds fall only about 26%. That is not a coincidence; it is the structure. Because your rollover is common equity subordinated to the fund's preferred, every dollar of underperformance hits the residual pool you draw from before it touches the protected tiers. When I model this for founders, the number that changes their mind is rarely the base case. It is seeing that a modest miss on EBITDA, the kind that happens in a single soft quarter, cuts their second bite by more than a third while the fund sheds far less.

Scenario	Exit EBITDA	Exit multiple	Cash at close	Year 3 rollover	Total both bites
Bear	$2.2M	6x	$1.80M	~$2.50M	~$4.30M
Base	$2.5M	7x	$1.80M	$3.88M	$5.68M
Bull	$2.8M	8x	$1.80M	~$5.45M	~$7.25M

The holding period math: why year 3 is the optimistic case

The brief that starts most of these conversations assumes a year-3 exit. The data says treat that as the bull case for timing, not the base. PEInfo reported in February 2025 that the median LMM holding period had reached 5.8 years, the longest on record. McKinsey's 2026 global report puts the average at 6.6 years. Hamilton Lane frames 4 to 6 years as the typical LMM band. A three-year exit still happens, but it sits well below the median and depends on a cooperative exit market.

The timing is not just an inconvenience for your liquidity. It compounds against your payout. The preferred return accrues at 8% every year the fund holds. Over three years it takes about $0.47M off the top before your residual forms; over five years that figure grows to roughly $0.84M. Every additional year of hold is another year of preferred return skimmed ahead of your split, and another year your $1.2M is locked up. So the founder who was told "we will flip this in three years" and mentally spent the second bite should re-run the plan on a five to seven year hold, because that is the realistic window.

What to negotiate: four levers that move money toward you

None of this is legal advice, and every one of these points needs your M&A counsel to price against your actual term sheet. But there are four levers that reliably move dollars from the fund's tiers into yours, and knowing them changes how you read the first draft.

First, push for a European (fund-level) waterfall over an American (deal-level) one. An American waterfall lets the GP collect carry deal by deal; a European waterfall defers carry until the fund has returned all capital plus the preferred across the whole portfolio, which tends to preserve more residual for rollover holders like you. Second, negotiate the catch-up. A capped or 50% catch-up limits how much flows to the GP in tier three and starts the 80/20 residual split sooner, putting more of the pool in play for your share. Third, and most valuable on a deal this size, ask for pari-passu participation above the hurdle so your rollover sits alongside the fund's preferred rather than behind it. That single change can meaningfully lift your bear-case outcome, which is exactly the scenario where the standard structure hurts you most. Fourth, lock clean tag-along rights so you are guaranteed to exit on the same terms and timing as the fund at the second bite, rather than being left holding an illiquid minority stake.

A partial exit is not "sell half, keep half." It is a trade: certain cash today against a subordinated, debt-loaded bet on the fund's plan. The waterfall decides how that bet pays, and it pays the fund first in every scenario. Model your rollover on a bear case and a five-year hold before you sign, not just the base case in the pitch deck.

One more layer the model does not show: taxes. The cash at close, the rolled equity, and the eventual second bite can each be taxed differently depending on how the deal is structured, and the treatment materially changes what you keep. That is a conversation for your accountant and an interim CFO before you structure anything, not after.

Sources and methodology

PE fund economics are benchmarked to public terms databases and fund-level surveys, not a single deal. The 8% preferred return reflects the Goodwin Terms Database (November 2023), which found roughly 80% of PE funds use that hurdle. The 20% carried interest and 100% GP catch-up are standard structures documented across fund-formation references. Management fee levels come from Preqin's October 2024 vintage analysis (1.74% average, with LMM funds nearer 2.0%). See the Goodwin hurdle-rate study and Preqin's fee analysis.

The four-tier waterfall mechanics follow a published framework and were reconciled to the modeled deal. The tier order (return of capital, preferred return, GP catch-up, 80/20 residual split) and the worked dollar examples draw on Allvue Systems' American vs. European waterfall explainer. The catch-up figure equals about 25% of the preferred return at a 20% carry.

Entry and exit multiples reflect lower middle market and DTC-specific ranges, not headline strategic deals. Segment-wide LMM averages sit near 7.2x, sub-$25M deals near 6.1x, and DTC-focused buyers target 3.0x to 5.5x. Ranges are drawn from the CapitalPad LMM 2026 report and dated M&A market updates. A 5x entry and 7x exit are mid-range assumptions for a $10M revenue brand.

Holding-period figures come from dated industry research and are measured from fund entry. The 5.8-year median is from PEInfo, February 2025; the 6.6-year global average is from McKinsey's 2026 Global Private Equity Report. Note that different providers measure holding periods differently, so figures vary by source.

The scenario and waterfall dollar figures are a model, not a specific transaction. The base case is fully reconciled; the bear and bull rollover figures apply the same waterfall logic to different EBITDA and exit-multiple assumptions, holding remaining debt constant at $3.0M across all three scenarios (the same figure used in the base-case table). Treat every number here as illustrative and run your own offer through the math before deciding.

Frequently asked questions

what does it actually mean to do a partial exit with a pe firm?

You sell a majority stake (typically 51% to 80%) for cash now and roll the rest of your equity into the new company the fund controls. You get liquidity today, keep a smaller ownership piece, and get a second payout when the fund sells the whole thing later. The catch is that your remaining equity is usually common stock sitting behind the fund's preferred return.

how is my payout calculated when i sell 60% of my brand?

Start with EBITDA times the entry multiple to get enterprise value, subtract the senior debt the deal takes on, and you are left with the equity check. You sell your 60% of that equity for cash and keep 40% as rollover. On a $10M brand at 15% margin, 5x entry, and 3x debt, that is roughly $1.80M cash and $1.20M rolled.

what is a distribution waterfall and why does it matter to me?

It is the payout order at the second exit. Money flows in tiers: the fund gets its capital back first, then its 8% preferred return, then the GP catch-up, and only then does the residual pool get split. Your rollover equity draws from that final residual, which is why timing and multiple matter so much to you and comparatively less to the fund.

what is a preferred return and how does it eat into my second bite?

The preferred return, or hurdle, is a guaranteed rate (usually 8% compounded) the fund earns on its invested capital before profits get split. On $1.8M invested over three years that is about $0.47M skimmed off the top before your residual pool even forms. Hold longer and it compounds larger, shrinking your share further.

what is the gp catch-up and how much does it cost me?

After the preferred return is paid, the GP catch-up sends the next slice entirely to the fund manager until their cut of total profit reaches 20%. At a 20% carry that catch-up equals about 25% of the preferred amount, roughly $0.12M on this deal. It is small in dollars here but it delays the point where your residual split begins.

how long will the pe firm actually hold before selling?

Longer than the pitch usually says. The current median lower middle market hold is 5.8 years and the global average is 6.6 years. A three-year exit is the bull case for timing. Budget for your rollover to be illiquid for five to seven years, and remember the preferred return keeps compounding against you the whole time.

is a partial exit better than a full sale if i think the business will keep growing?

It can be, because you get cash now and a second bite on the upside you help create. But the waterfall makes your second bite swing hard with performance in both directions. If the business grows as planned you can beat a full sale; if it misses, your subordinated rollover gets compressed far harder than the fund's position does.

what should i try to negotiate to protect my rollover?

Four things worth real money: a European (fund-level) waterfall instead of American, a capped or 50% GP catch-up, pari-passu participation so your rollover sits alongside rather than behind the preferred, and clean tag-along rights so you exit on the same terms at the second bite. Get M&A counsel to price each one against your specific offer.