Selling Your Small Business to Private Equity: What You Need to Know

When it comes to selling your small business, one of the options that might surface is a private equity (PE) acquisition. But is selling to a PE firm the right move for you, your employees, and the future of the company you've built? Private equity buyers are often well-funded, professionally managed investment groups looking for stable, growing businesses to add to their portfolios. Their expertise, capital resources, and strategic guidance can be appealing, but the decision is far from one-size-fits-all.

In this article, you will learn how to:

• Understand what it means to sell your business to a private equity firm

• Evaluate the pros and cons of a PE deal versus other buyer types

• Determine if your business is the right size and fit for a PE acquisition

• Weigh “platform” vs. “add-on” status and how it affects deal dynamics

• Prepare for what private equity buyers expect, including deal structures, cultural impacts, and non-compete requirements

• Navigate negotiations, the post-sale transition, and the timeline for a second exit

What is a Private Equity Buyer?

Private equity firms are investment groups that raise capital from various sources—such as pension funds, insurance companies, and wealthy individuals—and deploy that capital into acquiring businesses. Their goal is to grow the value of these companies, improve their operations, and eventually sell them at a profit. For a small business owner, this may mean access to professional management expertise, expanded resources, and capital for growth initiatives.

Are You the Right Size and Fit for Private Equity?

Typical Thresholds and Criteria

While PE firms come in all shapes and sizes, many have minimum thresholds for annual revenue or EBITDA (earnings before interest, taxes, depreciation, and amortization). For instance, a common lower bound business valuation might be $1–$3 million in EBITDA, though some firms target even smaller businesses.

• EBITDA sweet spots: If your business is under $1 million in EBITDA, you may be below many PE firms' radars—or you might be viewed as a smaller “add-on” (more on that below).

• Stability matters: PE groups generally prefer stable cash flow and predictable revenues over a roller-coaster earnings history.

Quick Tip: Before considering a PE sale, ensure your financials and assets are in good shape. Many firms require at least three years of clean, verifiable financial statements.

Platform vs. Add-On Acquisitions

Platform Acquisitions

A platform is typically the first business a PE firm buys in a particular sector. The firm plans to build around that platform by adding smaller, complementary acquisitions. If you're large enough—or have a unique niche—your business could be an attractive platform candidate. Platform businesses typically have more than $2-3 million EBITDA and usually closer to $5-10 million.

• Pros: As a platform, you may command a higher valuation and see a deeper partnership with the PE firm.

• Cons: PE firms expect strong management teams and growth potential in platform deals, so your business must be well positioned for rapid scaling.

Add-On Acquisitions

If your business is smaller or complements an existing portfolio company, you might be an add-on acquisition. Here, you'll be integrated into another company already owned by the PE firm.

• Pros: The PE firm may offer robust operational support and immediate synergies with the existing platform.

• Cons: Decisions may be more centralized around the platform, meaning less autonomy for your team.

Are You Ready to Consider Private Equity?

Personal and Financial Considerations

Before deciding if a PE sale is right, step back and consider:

• Lifestyle and career goals: Are you looking for a clean exit, or do you want to remain involved in the business's growth?

• Financial targets: Does selling to a private equity firm align with your desired payout, liquidity events, and long-term wealth strategy?

• Risk tolerance: PE firms often require the former owner to “roll over” a portion of equity, meaning you'll retain a financial stake in the business. Are you comfortable keeping some skin in the game?

Market Timing

• Economic climate:Favorable lending rates and stable markets can increase PE activity and valuations.

• Industry interest: If your sector is “hot,” you may see stronger offers from multiple PE firms.

Quick Tip: Selling to a PE firm often involves a partnership mindset. Ask yourself if you're ready for that kind of relationship, rather than simply handing over the keys.

Weighing PE Firms vs. Other Types of Buyers

Not all buyers have the same motives or approaches. Understanding the differences helps you evaluate if a PE deal fits your vision.

Common Buyer Types

• Individual Buyers:Often first-time owners or executives with limited capital. These deals tend to be simpler but can lack the strategic heft and resources a PE firm brings.

• Strategic Buyers (Competitors, Suppliers):They know your industry and may pay a premium for synergies. This can mean a higher initial price, but they may fold your operations into theirs.

• Private Equity Firms: Aim to grow and improve your company, often keeping your brand and operations intact while providing capital for expansion and professionalizing the business.

PE Firms: Pros and Cons

Pros:

Cons:

Quick Tip: Interview multiple PE buyers. Each has its own style, growth strategies, and expectations. Don’t assume all PE firms are alike.

Impact on Employees and Culture

PE firms are known for introducing professional management systems and data-driven decision-making. While this often leads to improved performance and growth, it can also bring cultural shifts:

• New metrics and reporting: Employees may need to adapt to more formal KPIs and accountability structures.

• Operational changes: Expect streamlined processes or even restructuring if the PE firm identifies inefficiencies.

• Retention and morale: Some PE firms offer equity or bonus plans to incentivize key employees. Others may reduce headcount in areas they deem non-essential.

Key Takeaway: If employee well-being and culture are top priorities, discuss with the PE firm how they plan to integrate your team. Each PE group has a different approach to post-acquisition management.

Understanding Private Equity Criteria and Valuation

What PE Firms Look For

Private equity investors focus on businesses that offer growth opportunities, stable cash flow, and operational scalability. Key factors include:

• Earnings quality: Strong EBITDA or SDE, with clean financials and minimal add-backs.

• Growth potential: Opportunities to expand into new markets, enhance margins, or launch complementary products.

• Management team: A capable team that can run the business with minimal owner dependence, increasing the company’s resilience.

Valuation Considerations

PE buyers generally use earnings-based valuation (EBITDA multiples), adjusted for risk factors such as customer concentration, owner dependence, and market volatility. They often have target returns in mind and will structure their offer accordingly.

• Platform Premium: If you're sizable enough to serve as a platform, you may command a higher multiple.

• Add-On Discounts: Smaller companies or those that fill a niche for an existing portfolio company may see lower multiples but still benefit from synergy-driven growth post-acquisition.

Structuring a Deal with a Private Equity Firm

Equity Rollovers and Partial Exits

Unlike a full buyout from an individual or strategic buyer, PE deals often involve an equity rollover—where you sell most of your shares but keep a minority stake. Benefits include:

• Second bite at the apple: If the PE firm grows the business and sells it later at a higher valuation, you can profit again.

• Ongoing involvement: Stay on in a strategic or advisory capacity, aligning your interests with the new owners.

Non-Compete and Employment Agreements

PE firms typically include non-compete clauses to protect their investment; you may be restricted by sales agreement from starting a competing venture for a certain period. Additionally:

• Consulting or employment terms: You may be asked to remain in a leadership or advisory role for a set timeframe.

• Restricted covenants: These clauses ensure your knowledge and relationships benefit the PE-owned company, not a future competitor.

Debt and Leverage

PE firms often use leverage (borrowed money) to finance acquisitions. While this can boost returns, it also introduces debt that the business must service.

• Assess comfort level: A highly leveraged deal can increase operational risk, especially if cash flow dips.

Earnouts

Expect deal structures that tie a portion of your payout to future performance metrics. Earnouts are common in PE deals, ensuring both parties remain committed to the business's continued success.

Quick Tip: Be open to creative deal structures. A PE firm may propose payment terms that seem complex initially, but if they align with your long-term goals, they can result in a better overall outcome.

Navigating Due Diligence and Closing

What to Expect in Due Diligence

Private equity buyers conduct extensive due diligence to verify every aspect of your business:

• Financial verification: Audited financials, tax returns, and detailed P&L statements.

• Operational review: Inventory management, supply chain stability, and documented processes.

• Legal and compliance checks: Employee contracts, customer agreements, and pending litigation.

Quick Tip: Get ahead of the process by organizing key legal documents, cleaning up financial statements, and documenting all significant operational procedures. This instills confidence and streamlines negotiations.

Closing the Deal

Once due diligence is complete, you'll negotiate the final price and purchase agreement. Plan for:

• Transition period: You may stay involved for 6-24 months post-closing to ensure a smooth handover.

• Communication strategy: Your employees, customers, and suppliers need clarity about the transition and the new ownership’s growth plans.

Life After Selling to a Private Equity Firm

Post-Sale Involvement and Timeline for a Second Exit

If you retain a stake, your role might shift to advisory rather than day-to-day business operations. You'll have the potential for a second exit when the PE firm eventually sells (often in 3–7 years). This timeline can vary:

• 3-5 Years: Some firms look for a quick turnaround if they can rapidly scale the business.

• 5-7+ Years: Others may hold longer if the growth or market conditions aren’t yet optimal.

Strategic Changes and Culture

PE firms usually introduce professional management systems, performance metrics, financial goals, and growth initiatives:

• Rapid growth: Potential for acquisitions, new product lines, or geographic expansion.

• Cultural shifts: While improvements can supercharge the company, it may feel more corporate.

Future Goals

If you've retained equity and the business thrives, you may see a higher valuation when the PE firm sells again. Alternatively, you can use the initial proceeds to pursue new opportunities, whether that's starting another venture or enjoying a well-deserved retirement.

Summary

1. Assess your readiness: Confirm your business meets typical PE thresholds, and decide if you’re prepared for a partnership structure.

2. Determine platform vs. add-on potential: Larger, well-established companies often fetch higher multiples as a platform.

3. Consider employees and culture: Understand how a PE deal may impact your team’s day-to-day experience.

4. Expect non-competes and partial involvement: PE deals often include minority rollovers, non-compete clauses, and post-close leadership or advisory roles.

5. Prepare for due diligence: Organize documents, clean up financials, and streamline operations to reassure buyers.

6. Plan the transition: Define your ongoing role and communicate openly with employees, customers, and suppliers.

7. Think long term: Be aware that PE firms typically exit in 3–7 years, offering the possibility of a second, potentially larger payout.

Next Steps

Still unsure if a private equity sale is right for you? Every business sale situation is unique. Whether you're just starting to explore options or ready to talk with potential buyers, we're here to help guide your path forward.

Schedule a free confidential consultation to:

• Understand how PE buyers might value your small business

• Learn about the current buyer demand in your industry

• Get expert advice on timing, structuring the deal, and preparing for due diligence

OffDeal leverages advanced technology and expertise to help small business owners achieve the same quality of M&A service previously reserved for large corporations. Our mission is to ensure every business owner has the opportunity to maximize their value when they're ready to sell.