What Does
J-Curve Mean?
A j-curve is a financial term generally used in many financial applications to illustrate initial negative returns followed by increasing positive returns after a period of time.
In the context of selling a business to financial buyers, sellers should understand that private equity firms usually expect a j-curve in their investments. This is because the initial years will show negative returns in their funds as capital is being deployed, and then from approximately year five and afterwards the returns turn positive as the investments flow cash back and are ultimately sold.
Divestopedia Explains J-Curve
The j-curve is good to understand for business owners who partner with private equity firms, because it shows owners what is expected in terms of timing of the return and general behavior for the investment. Private equity firms usually hold onto investments during the first 5 years since their limited partners expect initial negative returns as part of the j-curve. This provides sufficient time to improve the operational efficiency of the company and create value that is ultimately monetized at exit once five or more years have passed.