Private Equity Firms: Are They a Good Fit for Your Business?

By Erick Hamdan
Published: August 22, 2018 | Last updated: March 21, 2024
Key Takeaways

How to assess the fit with a private equity firm so you get the price and terms you want.


When you're selling a company, figuring out what type of buyer fits you is just as important as the final purchase price. Are you looking for a partner who can help you grow the business and exit slowly? Or perhaps you want the transition process to be slow and evolutionary rather than fast and revolutionary. In these cases, a private equity (PE) partner may be the right fit for you. In this article, we discuss what a PE firm has to offer.


(If you want to learn a bit more about PE firms in general, check out What Is a Private Equity Firm?)

How Private Equity Firms Generate Value

PE firms generate value in their investments by focusing on the following:

  1. Developing operational metrics to drive business efficiency, resulting in higher margins and EBITDA;
  2. Hiring and/or developing the existing management team to transition from an owner managed culture to a professionally managed culture;
  3. Focusing on balance sheet management so additional free cash flow can be generated;
  4. Developing the processes and systems so the company becomes more predictable and scalable; and
  5. Investing in other companies that may be tucked in or merged together to create a larger industry player.

Ultimately, PE firms understand what it takes to generate a high valuation for a company on exit. The most important value creator is increased free cash flow from higher revenue, improved margins and disciplined balance sheet management. The biggest benefit of partnering with PE firms is learning how to increase free cash flow and value, even if a sale is not imminent. It can be like taking the "life experience" MBA on value creation in private companies.

Common Hurdles in Going the Private Equity Route

One of the biggest challenges is that the financial discipline required to generate free cash flow can result in a disconnect between company owners and PE firms. The company owner is usually very good in the industry in which he/she operates, knows the customers, how to get work and how to deliver on the service. Therefore, company owners focus significantly on generating revenue and keeping the company working.

PE partners are primarily interested in generating free cash flow. This means driving top-line revenue growth, improving margins, setting up working capital management and managing capital spending. PE firms take an interest in this because a company that shows predictable and expanding margins can be sold at a higher multiple. In addition, disciplined balance sheet management translates into higher free cash flow, which can then be used to pay down debt or pay out dividends.


For entrepreneurs who are used to the concept of "all revenue is good revenue", these financial disciplines can be difficult to adapt to. They create value in a business and make company owners better financial managers, but the transition can be difficult, requires patience and is only good for company owners ready to let go and embrace a partnership approach to managing the company.

Is Private Equity a Good Fit?

Before you sign a letter of intent with a strategic buyer offering you a really high multiple, ask yourself if you are willing to let your business be totally absorbed. If this makes you second guess yourself, then the PE firm's evolutionary approach may be a better fit. However, like any other type of company, not all private equity firms are created equal.


Don’t be afraid to conduct your due diligence and ask lots of questions. This is going to be a five to 10 year marriage, so it needs to be mutually beneficial. Discuss what the plans are for your company, how the private equity firm intends to create value in your business and what the monetization strategy is. What is the 90-day plan, the two-year plan, the five-year plan? More importantly, look at the firm's track record and talk to previous investees about their experience.

Younger firms may not have as much experience to help you with your business, or they may have additional appetite for risk and, therefore, add additional debt to the balance sheet. Older, more established firms may not charge fees, and because they have enjoyed a certain level of success already, may be less inclined to take additional risk, sacrificing potential financial gains to protect reputation capital. However, with young firms you get active management and the assurance that the partners will be around for the duration of the investment — and that they won't be overly set in their ways.

An Outstanding Partner — If You're Prepared

The right PE firm can be an outstanding partner to help you take some chips off the table, allow you to exit your business in a controlled fashion and even allow you to sell your business twice when they exit the investment. Just make sure you are prepared to have some active partners in the business.

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Written by Erick Hamdan

Erick Hamdan
Erick works with business owners, investors, and private equity firms looking to create value and maximize their returns on exit. Working as adviser, founding partner, and/or CFO of three private companies that each grew to revenues over $300 million, he has worked on valuing, acquiring, and integrating over 30 companies.

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