Scott Foster · Shape Executive · Transactions & Value Creation
The Investment Thesis Comes First
Every private equity acquisition is underwritten by an investment thesis. The thesis answers a specific question: how will this business be worth materially more in three to five years than it is today?
That question is answered before a formal process begins. Private equity firms have a view on markets, sectors, growth vectors, and consolidation opportunities. When they approach a business or assess one through an adviser process, they are testing whether the business fits a thesis they have already formed.
A founder who understands this is a better counterparty. They can speak to the specific elements of their business that are relevant to the buyer's thesis — growth in an underpenetrated market, operational leverage that has not yet been realised, a management team capable of executing at greater scale. A founder who does not understand this presents financial history and hopes for the best.
What Private Equity Looks For In A Business
EBITDA Is The Starting Point, Not The Conclusion
EBITDA is the unit of account in private equity. It is how entry valuation is calculated, how returns are modelled, and how exit value is projected. But EBITDA is the starting point of the assessment, not the conclusion.
What matters is the quality of the EBITDA. Recurring revenue trades at a premium to project-based revenue. Earnings derived from a diversified customer base trade at a premium to earnings concentrated in two or three accounts. EBITDA generated by a business with documented, institutionalised processes trades at a premium to EBITDA that depends on the personal effort and relationships of the founder.
EBITDA margin trajectory matters. A business generating fifteen percent margins with a credible path to nineteen percent will attract a higher entry multiple than a business generating eighteen percent margins with no visible lever for improvement. Private equity models the exit as well as the entry.
And EBITDA normalisation matters, in both directions. Aggressive adjustments that cannot be defended under scrutiny will be unwound in diligence — and the damage to credibility at that moment is often more consequential than the adjustment itself.
How Private Equity Values A Business
Management Is The Acquisition Risk That Cannot Be Priced Away
Private equity cannot manage the businesses it acquires. The management team that operates the business after completion is the primary vehicle for value creation.
This makes the management assessment one of the highest-stakes components of any private equity diligence. The question is not whether the current team can run the business as it exists today. The question is whether they can run a materially larger, more institutionally governed, more operationally complex business — because that is what the investment thesis requires.
A founder who is simultaneously the CEO, the CFO, and the head of sales is not presenting a management team. They are presenting a key person risk. That risk will be priced, whether through a lower headline multiple, a longer earnout, a management restructure condition, or a requirement that the founder remain actively involved for an extended post-acquisition period.
The management teams that impress private equity investors are those with demonstrated autonomy. They have made decisions — real ones, with real consequences. They have managed through operational difficulty. They can speak credibly to the business, its performance, and its strategy without the founder present. That depth does not appear in a process. It is built over years.
The question is not whether the current management team can run the business as it is. The question is whether they can run the business the investment thesis requires.
What Buyers Look For During Due Diligence
Operational Due Diligence Is Now Standard
Financial diligence asks: is the historical performance real? Operational diligence asks: is the business capable of delivering future performance? The processes. The systems. The people and their depth below the first line. The supply chain. The capacity. The quality management. The data infrastructure. The gap between how the business presents in an information memorandum and how it actually operates on a given Thursday afternoon.
Founders who have run their businesses operationally — who understand throughput, yield, machine utilisation, inventory turns, debtor days, and unit economics — are in a fundamentally different position in operational diligence than those who manage at a financial level only. The quality of operational insight a founder can demonstrate is itself a signal about management capability and business quality.
Working Capital Is A Value Transfer Mechanism
Every private equity transaction specifies a normalised working capital target. If working capital at completion is below the target, the seller funds the difference from the sale proceeds. A founder who has not worked through the working capital mechanics — who is focused on the headline enterprise value rather than the net proceeds — frequently discovers at completion that the two numbers are materially different.
Beyond the completion mechanics, private equity treats working capital as a signal. A business with short debtor days, efficient inventory management, and well-managed creditor terms generates cash reliably. Cash conversion is a quality of earnings indicator. It affects valuation.
What Happens After The Deal Closes
Private equity investors are not passive shareholders. After completion they are active participants in the business — with specific expectations about governance, reporting, management cadence, capital allocation, and strategic direction.
Founders who have not worked through what this relationship will look like in practice — what authority they retain, how decisions get made, what happens when management and the board disagree — often find the post-acquisition period more challenging than they anticipated. The conversations to have about governance, decision rights, and operating principles are the conversations to have before the deal closes, not after.
Businesses considering a future transaction often discover that valuation outcomes are determined years before a process begins. Founder Readiness provides a structured framework for identifying the operational, commercial and governance factors that influence value before buyers arrive.