Short answer: how does selling to private equity work?

A private equity firm buys companies with money it has raised from investors, often adding money it borrows. When it buys yours, it is buying three things: your earnings, the team that produces them, and the room it sees to grow the company and sell it again later. It may buy the whole company, or buy most of it and ask you to keep a stake, called rollover equity.

The price is usually paid with cash at closing, funded partly by debt the buyer raises, and sometimes with deferred terms such as a seller note or an earnout. What reaches you at closing can be much less than the headline price, so read the structure as closely as the number.

Being ready means earnings a buyer can verify, a team that can run the company without you, and a growth plan someone else can carry out. You are in the strongest position with several qualified buyers looking at once, confidentially, not just the one firm that called first.

How private equity buys a company

A private equity firm grows the companies it buys and later sells them to return its investors’ money, so it buys yours with the next sale already in mind.

A platform or an add-on

  • Platform: the firm’s first investment in an industry, the company it plans to build on. A platform buyer needs a management team that can run a larger company and a business strong enough to absorb acquisitions.
  • Add-on: a company bought by a business the firm already owns, to be combined with it. An add-on buyer can lean on its own management and systems, and it looks hardest at how your customers, services and people fit with what it has.

The same company can be a platform to one firm and an add-on to another, and each weighs it differently. That is one reason to talk to both.

All of the company or most of it

  • A full sale: you sell all of your shares and agree on a transition period.
  • A majority sale with rollover equity: you sell most of the company and keep part of your ownership, usually by reinvesting part of your proceeds in the company the buyer sets up to own the business. That stake pays out when the firm sells again, and it can end up worth more or less than at closing, or nothing.
  • A recapitalization: often called a recap, a change in who owns the company and how it is financed. In a majority recap the firm buys control; in a minority recap you keep it. Either way, you take some cash off the table.

How the price is paid

  • Cash at closing: paid from the firm’s fund and the money it borrows. This is the part of the price you can count on.
  • Debt the buyer raises: lenders lend against your company’s cash flow, and the company carries that debt after closing. Financing that is not committed can put the closing at risk.
  • Seller notes: you lend part of the price back to the buyer and are repaid over time. A seller note often ranks behind the buyer’s bank lenders, so if the company struggles, the banks are paid first.
  • Earnouts: part of the price is paid later, and only if the business reaches agreed targets after closing, under decisions you may no longer control.

These terms carry legal and tax consequences that depend on your situation, and this guide is not legal or tax advice. Work through every one with your own attorney and tax adviser before you agree to it.

What the process looks like from your side

First conversations and the NDA

If your company is growing, you may already get emails from private equity firms asking to talk. Before you share financials, customer names or contracts, the buyer signs a nondisclosure agreement (NDA). Share the most sensitive details later, and in stages, as interest becomes serious.

The letter of intent and exclusivity

A buyer that wants to proceed sends a letter of intent (LOI): the price, how it will be paid, the rollover, your role after closing and the main conditions. Most of an LOI is usually non-binding, but exclusivity usually is: a period in which you agree not to talk to other buyers while this one completes its diligence. Once you sign, your leverage drops, because the competition is gone. Settle the terms that matter most to you in the LOI, not later.

Quality of earnings and the rest of due diligence

Due diligence is the buyer checking that the company is what it was told. For a private equity buyer it usually starts with a quality of earnings review, or QoE: an accounting firm hired by the buyer tests whether your revenue, your earnings and the adjustments you made to them hold up, and how much working capital the business needs to run. Legal, tax, employee, technology and commercial reviews follow, and the lender runs its own. Some sellers commission their own QoE first so there are fewer surprises.

If diligence turns up problems, a buyer may ask to lower the price or change the terms, which is called a retrade. If you run a software company, what to expect in SaaS due diligence walks through the request list in detail.

The purchase agreement

The purchase agreement is the binding contract. It sets the final price and how it is paid, the promises you make about the business (representations and warranties), what happens if one turns out to be wrong (indemnification), any amount held back in escrow, and your employment and non-compete terms. Your attorney negotiates it. Your job is to make sure the points that matter most to you survive from the LOI.

The transition

After closing, expect new reporting, a board and often new hires, such as a finance leader. If you stay, your role, pay and authority are set in an employment agreement. If the firm plans add-ons, your company may start buying others, and any equity you rolled rides on how that goes.

What private equity buyers look for and pay more for

Every buyer looks at earnings first. After that, these are the things that most often move what a private equity buyer will pay and how much of the price comes at closing.

A management team that stays

A private equity firm does not plan to run your company itself. It will ask who your leaders are, how long they have been with you and whether they will stay after the sale. A team that runs daily operations today, and plans to keep doing it, makes the company much easier to back.

Recurring or repeat revenue

Contracts, subscriptions and customers who keep coming back make revenue predictable, and predictable revenue supports the debt the buyer plans to use. Show how much of your revenue recurs, how long customers stay and why the ones who left did.

Clean, verifiable financials

Buyers want statements that tie to your tax returns and bank accounts, monthly results, revenue and margin by customer and by product or service, and personal expenses kept out of the business. Every adjustment to earnings should have a document behind it, because the quality of earnings review will test each one.

Room to grow, including through add-ons

The firm has to see how the company can be bigger when it sells: new markets, new services, better pricing, or other companies it could buy and combine with yours. A credible growth plan, built on figures you can support, is worth preparing before the first conversation.

Limited dependence on you or one customer

If you win the big deals and make every decision, the buyer is paying for a company that may not run without you. If one customer is a large share of revenue, the buyer will ask what happens if it leaves. Owners who have reduced both usually get better terms, with more of the price paid at closing and less tied to future results.

Private equity or a strategic buyer?

A strategic buyer is an operating company, often in your industry or a neighboring one, that buys your business to combine with its own. A private equity firm is a financial buyer that backs the company to grow it and sell it again. A company a private equity firm already owns, buying yours as an add-on, sits between the two.

Either can be the right buyer. A strategic buyer weighs what your company adds to its own, and it may fold your team and name into its business. A private equity buyer usually keeps the company as a business of its own, wants its management to stay, and may ask you to keep a stake. Which gives you the better result depends on your company and on what matters to you: the price, how much of it is paid at closing, your role afterward, and what happens to your people.

Hello Exit’s Exit Report shows both the strategic and financial bands. The financial case reflects what the company supports on its own; it is not a guaranteed minimum. The strategic case is conditional and has to be proved by buyers competing for the company. Neither is a promised price.

Questions to ask a private equity buyer before you sign an LOI

  1. What is your plan for the company while you own it, and how will you grow it?
  2. Is this a platform or an add-on, and if it is an add-on, what will my company be combined with?
  3. What role do you want me to have after closing, for how long, and who will I report to?
  4. How much of the price is paid in cash at closing, and how much is rolled, deferred, held back or tied to an earnout?
  5. What happens to my rolled equity: what kind of shares, on what terms compared with the fund’s, and what happens if I leave or when you sell?
  6. How much debt will the company carry afterward, and is the financing committed?
  7. What could change your price after the LOI?
  8. May I speak with founders who sold to you, including one whose company did not go as planned?

Compare the answers across buyers, not just the prices.

Why several buyers at once beats one offer

One offer tells you what one buyer will pay, on that buyer’s terms, but not whether the price or the terms are good. Once you sign an LOI and agree to exclusivity, you lose the chance to find out.

Putting the company in front of several qualified buyers at once, confidentially, tests price and terms against each other, because each buyer weighs the same business differently. Buyers learn who you are only after signing an NDA, so employees, customers and competitors do not find out early.

Whether a business broker or an M&A advisor fits your sale depends on your size and your likely buyers; business broker vs M&A advisor explains the difference. If the sale is still years away, the five exit strategies show the other paths worth weighing.

Hello Exit is a sell-side M&A advisor for founders selling businesses from $1 million to $400 million, and it is the team behind 1,000+ acquisitions and exits. Every engagement starts from accurate information. Hello Exit’s Exit Report is an advisory estimate that shows the strategic case, where strategic buyers exist, and the financial case side by side, along with an honest read on readiness. If the business is not ready to sell, Hello Exit says so and helps you get there first.

See how the process works, from the first confidential call to closing.

Size matters too. Below roughly $1 million in value, a marketplace or local business broker is usually the practical route to a sale. Above $400 million, an investment bank is usually the better fit.

Before you talk to buyers

Common questions

Will private equity want me to stay after the sale?

Often, yes, at least through a transition, and a firm making a platform investment may want you to keep running the company. An add-on buyer may need you for less time, because the company it already owns has its own leadership. Agree on your role, pay and how long you will stay before you sign the LOI, and set it out in an employment agreement.

What is rollover equity?

Rollover equity is the part of your ownership you keep when you sell to private equity: part of the price comes as shares in the company that owns the business after closing, instead of cash. Those shares can be worth more or less at the next sale than at closing, or nothing. How the rollover is set up affects your taxes and your rights, so work through it with your attorney and tax adviser.

Is private equity better than a strategic buyer?

Neither is better by default, and either can be the right buyer. Which fits depends on your business and on what you want from the sale, and the surest way to find out is to talk to both at the same time.

Is my business big enough for private equity?

Hello Exit works with businesses from $1 million to $400 million in value. Size is only part of what private equity weighs: earnings it can verify, a team that stays, recurring revenue and room to grow matter too. A company that does not fit as a platform may still fit as an add-on to a company a firm already owns. Below roughly $1 million, a marketplace or local business broker is usually the better route.