Financial Poise
attract private equity buyers

How to Attract Private Equity Buyers

Priorities of a Private Equity Buyer

When a private equity (PE) buyer evaluates a potential acquisition, they may have different priorities than other buyers. Considerations in private equity transactions include:

  • Capability of senior management
  • Presence of a clear strategic vision
  • Presence of a roadmap to short- or long-term threats to the business
  • Target company/seller’s systems and controls
  • Overall industry characteristics
  • Growth prospects, both organic and follow-on acquisitions for the target
  • A reliable revenue base or costs that can be reduced

These things are essential to any potential buyer, but why especially so to a PE buyer? The first bullet is a clear example: PE firms want to keep senior management in place. A strategic buyer, i.e., a competitor, may top his list by eliminating redundant roles. So, as an owner or senior manager considering selling, you need to assess these factors honestly.

Evaluating a Target’s Asset Base in Private Equity Transactions

For two reasons, a private equity buyer almost always looks to leverage the seller’s asset base:

  • A target’s asset base enables the buyer to get a revolving credit facility. With that, he can fund operations, provide growth capital, and smooth business cycles.
  • The fixed asset base is downside protection for a PE buyer.  It establishes a floor value if the investment fails and the company liquidates.

Private equity buyers’ investment interests span the spectrum of industries, but specific components attract those buyers.

Investment Criteria

A seller must meet minimum investment criteria including, but not limited to:

  • Specific industries are of interest, and some are not, which narrows the field.
  • Minimum revenue thresholds
  • A seller’s strategic advantage within the industry
  • An established track record of creating cash flow and profitability
  • A readily identifiable and implementable strategic growth plan
  • A clear exit path for the private equity buyer. PE buyers typically hold investments for five to seven years before seeking liquidity through a sale or initial public offering.

Requisite Size

Some businesses, lacking enough revenue or expansion ability,  do not interest private equity buyers. For example, it’s overly challenging to scale some companies.

  • A single franchise store
  • An independent car wash
  • A solo professional services provider

A group of franchise stores under common ownership, multiple car washes, or a multi-city professional service firm are more attractive options. Benefits of Private Equity Transactions

Private equity funds move quickly when they have an investment committee vetting process. Private equity buyers examine the seller’s financial conditions, from evaluating the target to signing the purchase agreement. They provide continuous feedback about resulting concerns. A PE buyer may also be more inclined than other buyers to assist a seller in “taking money off the table” (i.e., the sale of a significant minority or majority equity stake). Private equity firms find growth or value investment opportunities, quickly assess the situation, move to invest capital expeditiously, help improve operations, and ultimately exit through a sale or initial public offering.

A PE buyer may have a higher risk tolerance when evaluating whether to invest in a company, differentiating itself from other competing buyers. For example, perhaps a target historically had positive cash flow but recently encountered an operational or macroeconomic issue causing a cash flow downturn. A PE buyer may be comfortable with that company’s growth prospects and asset base to support its acquisition thesis.

Finally, PE buyers look to partner with management and incentivize them with equity in the new company to align all interests. A private equity transaction may allow an owner to realize liquidity in his business.

Negatives in Selling to Private Equity

When selling to a private equity firm, certain risks or potentially negative aspects exist.

First, the seller should not expect to maintain control of the business, whether in operational control or equity ownership. Many private equity firms recognize and value senior management’s contributions.  They understand that the best way to motivate senior management is to provide equity ownership in the newly formed company. Equity reserved for management/employees may be limited to 5% to 15%. Often, PE buyers allow senior management to co-invest alongside them up to a cap, for example, 20% of overall equity.

Second, not all private equity firms are created equal. While the vast majority of PE buyers are interested in the growth and continued success of the business and its employees. There are PE firms that acquire companies as merely a means to a financial engineering end. A few red flags in a PE buyer’s ownership history:

  • Headcount reduction/forced turnover of senior personnel
  • Selling assets
  • Leveraging the business (i.e., leveraging the asset base to “swap out” invested equity for third-party debt)

Selling the company may be new and exciting for a business owner, but it is not unique to PE buyers. Of course, sellers need to approach any private equity transaction with eyes wide open. There are no “handshake” deals. Sellers should consider arming themselves with dispassionate third-party advisors – counsel, consultants, or investment bankers. Third-party advisors can strategize a negotiation, keep a buyer honest by imparting professionalism to the sale process, and ensure that the seller gets the best possible deal.

Additional Considerations for PE Buyers

Seller obligations – contingent and secured/unsecured – factor into the risk assessment and ultimate valuation assigned by a private equity buyer. Understanding the payment cycle of the company provides insight into the seller’s financial health. It’s also a reflection of management’s business operations philosophy.

  • Does management manage cash wisely?
  • Does management understand the business’s cyclicality?
  • Does management have a good rapport with vendors? Do they understand the business and work with it as a partner?

A seller that acutely manages its obligations demonstrates the financial discipline PE buyers look for when evaluating investment opportunities.

Any investor seeks to generate a return on capital; therefore, PE buyers focus on operating costs and growth prospects. If management has not made specific cost cuts, it must explain why not as well as profer an implementation plan.

A PE buyer evaluates the target’s industry and market position. A growth industry seller with a niche service or a unique product is attractive, especially with a considerable market share. Buyers value a target that is a platform for investment, serves as an add-on, or rounds out a geographic or product footprint. In other words, sellers should understand why a particular PE buyer may find more value in the business. Deep insight into your industry and competitors positions your company as an excellent investment opportunity.

Private equity buyers want a specific type of opportunity. Therefore, to market your company effectively, be astutely aware of the hard and soft metrics PE buyers use. See that

  • Your financial house is in order.
  • You understand your company’s value propositions and market position.
  • You have an experienced and trustworthy management team.
  • You can articulate a road map to more significant growth and profitability.

With these ideas in place, your company looks more attractive to a selection of PE buyers.


[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

This is an updated version of an article originally published on September 23, 2019. It has been updated by Courtney Smith]

©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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About Michael J. Gorman

Michael J. Gorman is a Director at Mufson Howe Hunter & Co. LLC. Mike is a skilled restructuring professional with expertise in advising middle-market companies facing financial and/or operational challenges including bankruptcy proceedings. He has completed over 40 sale and restructuring engagements involving mergers and acquisitions advisory, complex valuations, financial restructurings, and private placements of…

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