Private equity has become increasingly familiar to business owners. Owners considering a sale often have strong assumptions about private equity such:
“They only want huge companies.”
“They’ll fire everyone.”
“They only care about EBITDA.”
“I’ll lose control immediately.”
“PE firms are all basically the same.”
Like with everything else in life, reality is often different and nuanced. Private equity firms can have very different investment strategies, transaction structures, management philosophies, and expectations for the businesses they acquire.
Here are a few misconceptions worth reconsidering.
“Private Equity Only Wants Huge Companies.”
Not necessarily. Different firms target different company sizes and transaction types. Some focus on larger platform investments, while others specialize in smaller businesses, add-on acquisitions, or particular industries.
“They’ll Fire Everyone.”
That isn’t how a PE transaction works. Private equity firms are generally investing in businesses because they believe those businesses can grow and create value. Management and staff retention can therefore be extremely important.
Of course, management changes may happen after an acquisition. But an owner shouldn’t assume that selling to private equity automatically means the existing team disappears. The buyer’s investment thesis and plans for the business matter.
“They Only Care About EBITDA or the Numbers.”
EBITDA matters. Numbers matter. But it isn’t the entire story.
A buyer also cares about:
- Customer retention / concentration
- Management depth
- Market position
- Cash flow
- Growth opportunities
- Operational scalability
Two companies with identical EBITDA can present very different investment opportunities.
“I’ll Lose Control Immediately.”
This depends heavily on the transaction structure.
A seller may sell the entire company and exit. Or the seller may retain equity and continue participating in the business. Some transactions involve rollover equity, meaning the seller reinvests a portion of their proceeds into the company. That can create a different relationship between buyer and seller after closing.
The important question is what ownership, governance, and decision-making structure is actually being proposed?
“A Strategic Buyer Will Always Pay More.”
There’s no universal rule. Different buyers can see different value in the same company. A strategic buyer may see synergies that another buyer doesn’t. A private equity firm may see an opportunity to grow the business through acquisitions or operational improvements.
The best offer isn’t necessarily the one with the highest headline number, either.
Structure, certainty of closing, rollover equity, earnouts, employment arrangements, and post-closing obligations can all matter.
“All Private Equity Firms Are Basically the Same.”
This may be the biggest misconception. Often times what we find is that owners haven’t necessarily thought about the fact they will work closer with operational partners of the private equity firm, who are actual operators like themselves in the space. So they aren’t dealing with Wall Street day to day but actually working alongside or partnering with actual operators like themselves.
Additionally, buyers can differ significantly in:
- Culture
- Industry focus
- Investment size
- Investment thesis
- Use of leverage
- Hold period
- Management philosophy
- Add-on strategy
- Governance expectations
- Rollover requirements
- Desired seller involvement
Understanding the Buyer Matters
Selling a business isn’t simply about finding someone willing to write the largest check. The buyer will have a plan for the company. Owners should have a plan for themselves.
Understanding how a prospective buyer thinks, how they intend to grow the business, what role they expect the seller and management team to play, and how the transaction is structured can be just as important as the headline valuation.
Private equity isn’t one thing.
The right way to evaluate a PE buyer is to understand the specific firm, its investment strategy, and the specific transaction being proposed.
