Selling A Business To Private Equity
Private equity is not buying historical performance. It is buying future potential.
Private equity is not buying historical performance. It is buying future potential.
The private equity investment thesis is not primarily about what a business has done. It is about what the business can become, and whether the conditions exist for that transformation to be achievable within a defined investment period — typically three to five years.
Historical EBITDA is the starting point for the conversation, not the conclusion. What private equity is assessing, underneath the financial metrics, is whether the business has the platform, the management, and the market position to generate meaningfully higher returns than it is generating today.
EBITDA is the unit of account in private equity transactions. But EBITDA alone does not determine whether a private equity firm will invest, at what multiple, or on what terms. Quality of earnings matters as much as quantum. Recurring revenue trades at a premium to project-based revenue. Earnings from documented, scalable processes trade at a premium to businesses where performance depends on specific individuals.
EBITDA margin trajectory matters. A business generating 14% EBITDA margins with a credible path to 18% will attract a higher multiple than a business generating 16% margins with no clear lever for improvement. Private equity models the exit multiple as well as the entry multiple.
Private equity cannot manage the businesses they acquire. They invest. That means the management team that runs the business after completion is one of the highest-stakes assessments in any private equity transaction.
A founder who is also effectively the CEO, CFO, and head of business development is not presenting a management team. They are presenting a key person risk. The management teams that impress private equity investors are those with demonstrated autonomy. They have made decisions. They have managed through difficulty. They can speak credibly to the business without the founder in the room. That kind of management depth does not appear in a process. It is built over years.
"Private equity does not only buy profit. It buys confidence that the profit can continue, grow and be governed after completion. That confidence is built in the twelve months before a process — not in the pitch meetings during one."
Operational due diligence is now standard in mid-market private equity transactions. It goes beyond the financial audit to examine how the business actually operates — processes, systems, people, capacity, supply chain, customer relationships, and the gap between how the business presents and how it performs.
Founders who have run their businesses operationally — who understand throughput, yield, machine utilisation, inventory turns, and unit economics — are in a very different position in operational diligence than those who manage at a financial level only.
Control. In most private equity transactions, the founder does not exit. They remain as CEO or executive chair with a significant equity stake. They are operating in partnership with an investor who has specific return requirements, a defined investment horizon, and a governance structure that is more formal than anything the founder has experienced previously.
Speed. Private equity processes are intensive and move quickly once they begin. Founders who have not prepared adequately find themselves making consequential decisions about structure, warranties, earnout terms, and management equity under time pressure.
The relationship. Post-acquisition, private equity investors are active partners in the value creation plan. Founders who have not worked through what that relationship will actually look like often find it more challenging than they anticipated. The conversations to have about expectations, governance, and operating principles are the conversations to have before the deal closes. See Before You Say Yes.
An earnout is a deferred component of the sale price contingent on the business achieving agreed performance targets after the transaction closes. The practical risk is that targets, measurement periods, and adjustment mechanisms are negotiated by the buyer — and the founder's ability to influence outcomes may be more constrained post-completion than they expected.
Private equity values a business primarily as a multiple of maintainable EBITDA. But the multiple applied depends on the quality and durability of those earnings — not just the quantum. EBITDA margin trajectory, management independence, customer concentration, growth runway, and reporting quality all affect what multiple a buyer will apply.
In most mid-market private equity transactions, the founder does not fully exit at completion. They typically remain as CEO or executive chair with a significant equity stake, for a period negotiated as part of the deal. The length of involvement and authority retained during it are critical deal points.