At some point, many ambitious business owners find themselves in a conversation with a private equity firm. If this happened to you and you didn’t know what to do, or if you want to be ready such a moment, this post is for you.
Sometimes the conversation is initiated by the owner himself through a deliberate decision to explore whether a PE partner could accelerate growth or provide liquidity. Sometimes it comes the other way where the owner receives an unsolicited approach from a fund that has identified the business as an attractive target.
Either way, the business owner who walks into that conversation unprepared is at a significant disadvantage.
Private equity firms do this every day. They have seen hundreds of businesses, they know what they are looking for, and they are very good at identifying quickly whether a business and its owner are worth their time.
The first conversation sets the tone for everything that follows.
Understanding What Private Equity Actually Wants
Before preparing for the conversation, it helps to understand what a PE firm is actually looking for because it is not always what business owners assume.
Private equity investors are financial buyers. They acquire stakes in businesses with the explicit goal of generating a return on their investment, typically over a three to seven year horizon, through a combination of earnings growth, multiple expansion (the price paid as a function of earnings), and financial engineering (debt and other financial instrument).
That means they are asking a specific set of questions about every business they look at:
Can this business grow?
PE firms are looking for businesses with a credible path to significantly higher earnings. Organic growth, market expansion, acquisitions, pricing power are all mechanisms that can support the growth thesis. What they are not looking for is a business that has plateaued.
Is the business defensible?
What protects this business from competition? Customer relationships, proprietary technology, regulatory barriers, switching costs — PE firms want to understand what makes the earnings durable.
Can it run without the founder?
This is the question that catches most business owners off guard. If the business depends heavily on the owner's relationships, knowledge, or presence, a PE firm sees risk. They are backing the business, not just the person.
What does the financial profile look like?
Consistent revenue growth, strong and improving margins, predictable cash flow, and clean financials are the foundation. A business with volatile or declining margins is a much harder investment case regardless of its other qualities.
Understanding these questions before you walk in means you can frame your business honestly in a way that speaks to what the investor is trying to assess.
Getting Your House in Order
The quality of your preparation will be visible within the first thirty minutes of any serious PE conversation. Here is what needs to be in order before you sit down.
Clean, well-presented financials
Three years of financial statements — ideally reviewed or audited — presented in a format that is easy to read and clearly tells the story of the business's performance. Management accounts for the current year to date. A clear normalisation of earnings that removes owner-specific costs, one-time items, and non-recurring expenses.
The normalised EBITDA is the number PE firms will anchor their valuation to. Knowing your number — and being able to defend it clearly — is the starting point for any serious conversation.
A credible financial model
A forward-looking financial model that shows where the business is going — revenue projections, margin trajectory, key assumptions — presented in a way that is ambitious but defensible. PE firms will stress-test your assumptions. You need to know what they are and why they are reasonable.
A clear growth story
What is the opportunity? Why is this business positioned to capture it? What has been holding growth back, and how does a PE partner change that? The growth thesis needs to be specific, credible, and connected to the financial model.
Vague ambition such as statements like "we think there is a big opportunity in this market" are not part of a growth thesis. A specific articulation of where revenue will come from, how margins will develop, and what capital or capability is needed to get there — that is a growth thesis.
Management team depth
PE firms invest in businesses, not just founders. A business with a strong management team that can execute independently is significantly more attractive than one where everything flows through the owner.
Before the conversation, it is worth being honest about where the dependencies are. When key relationships, key decisions, or key knowledge sit exclusively with the founder, this is a risk a PE firm will price meaning they will offer a lower price compared to a similar business with strong management, or they may even just walk away from the business.
An understanding of your capital structure
What debt does the business currently carry? What are the terms? How does the existing capital structure affect the PE firm's options? A business with clean, simple capital structure is easier to invest in than one with complex or poorly documented obligations. Some businesses have inherently more complex capital structures, one of the key components of capital is that it is also adequate to the business.
What the Conversation Actually Looks Like
A first conversation with a PE firm is typically exploratory. They are trying to understand the business at a high level and assess whether there is a fit worth pursuing. You are doing the same, is this firm a firm I would like to work with in the future?
The conversation will typically cover:
The history and evolution of the business
The competitive landscape and the business's position within it. Most owners have a good understanding of this, but if you are not sure, do your research prior to the meeting
Revenue and earnings, recent performance and trajectory
The management team and how the business is run
The owner's motivations: why now, what are they looking for, what does a good outcome look like? While usually overlooked, this is an important concept for PE firm and worth thinking about why you want to sell now
A preliminary sense of valuation expectations. This one is complex and requires preparation. We usually advise not to make strong valuation ask early on, but it is important to have an idea. Showing flexibility early on is also important. Having no number is problematic and signal lacks of preparation. This is when the negotiation begins, be ready
How Businesses Like Yours Are Valued
Private equity firms typically value businesses on an EBITDA multiple basis. This is a multiple applied to normalized earnings that reflects the quality, growth profile, and risk characteristics of the business.
Multiples vary significantly by sector, size, growth rate, and market conditions. Multiples range is quite large and dependent on many economic and business specific, we caution about looking at average without understanding the specifics you are navigating in.
Understanding where your business sits and why is an important part of preparation. The factors that drive a higher multiple include:
Consistent revenue growth above market rates
High and improving gross margins
Recurring or contracted revenue
Low customer concentration
A strong management team
A clear and credible growth thesis
The factors that compress a multiple include customer concentration, founder dependency, declining margins, volatile cash flows, and a business model that is difficult to scale.
Knowing your strengths and vulnerabilities before the conversation means you can address them proactively rather than being caught off guard.
A note on other valuation method
There exists multiple valuation methods and PE will likely use a mix of all of them when evaluating your business. Popular methods include:
Discounted Cash Flow
Leverage Buyout Valuation
Capitalization of earnings
Disposition value
In the end, any method can also be summarized into a multiple. The multiple is most commonly known and observable metric, but understanding the behind-the-scenes action is very helpful when preparing your view of valuation.
Supply and Demand
Finally, just like any market, valuations are also a by-product of supply and demand. Businesses that are highly sought after will command higher multiples than those who have less demand around the shares of the business. Having a thorough process when you are selling truly helps bring the best price.
What to Watch Out For
The unsolicited approach
When a PE firm approaches you, it is flattering. Most owners have never thought about it when it happens. It can also be dangerous if you are not prepared.
An unsolicited approach does not mean you are in a competitive process. It means one buyer is interested. And one interested buyer, negotiating without competition, will almost never offer full value. If you receive an unsolicited approach and it is serious, the right response is to get proper advice before engaging in detail, not to negotiate directly without understanding your options.
Giving away too much too soon
PE firms are skilled at gathering information. Early in a process, before any formal agreements are in place, be thoughtful about what you share and when. Detailed financial information, customer lists, and key contract terms should be shared under a proper non-disclosure agreement, as part of a structured process, not in an exploratory conversation.
Misaligned expectations on control
PE investment almost always involves giving up some degree of control over business decisions. The new owner will set the strategy and will change the pace of growth. Understanding what that means in practice, and whether you are comfortable with it, is an important question to answer before you get deep into a process.
Evaluating the relationship is as important as evaluating the valuation. Not all firms function the same way and they will not all have the same approach following the transaction.
The Role of Advisors
Preparing for and navigating a PE conversation is not something most business owners should do alone.
The right advisor brings three things: preparation support that ensures you walk in ready, process design that creates competitive tension even in an exploratory conversation, and negotiating experience that protects your interests when it matters most.
The cost of good advice in this context is almost always a fraction of the value it creates. The difference between a well-advised PE process and an unadvised one can be measured in valuation multiples, not just dollars.
The Bottom Line
A private equity conversation is an opportunity but only for the business owner who is prepared to make the most of it.
The businesses that achieve the best outcomes from PE partnerships are the ones that understood what they were walking into, prepared their financial story carefully, and engaged the right support to navigate the process with confidence.
If a PE conversation is on your horizon, whether you are initiating it or responding to an approach, the time to prepare is before it starts.
We advise business owners preparing for and navigating private equity conversations from financial preparation and growth story development through to process design and negotiation support. If this is on your radar, we'd be glad to have that conversation first. Book a call here
