Is Your Company Ready for Private Equity? A Checklist

Most owners ask one question before a first call: “Would a private equity firm even want my company?” You can answer it yourself. Start with what one firm says it looks for, then add what outside advisers say about financial readiness.

What does Capstreet look for in a company?

Capstreet looks for businesses with a tenured team of owners or managers seeking a majority capital partner, with solid financials, a defensive business model, untapped growth potential and competitive advantages within a market niche. The firm lists five points under “What We Look For”:

• “Entrepreneur-owned businesses services companies”
• “$3 to $15 million of EBITDA”
• “Primarily majority investments”
• “Entrepreneurs reinvest alongside Capstreet”
• “Ability to apply the Capvalue Framework®”

Capstreet also says it focuses on “developing highly profitable, differentiated businesses that can be successful well beyond our ownership period.” Other firms publish different ranges, so read each firm’s criteria before you reach out. Our full list is on the deal criteria page.

How can you test your company against those criteria?

Score each point as a yes, a maybe or a no. A “maybe” tells you where to work before a sale. This table turns each Capstreet criterion into a question you can answer with your own numbers.

Be honest about each row. A buyer will test every answer in diligence, and a gap you name first costs you less than a gap the buyer finds.

Are your financials ready for a buyer?

Your financials are ready when a stranger can read them and trust them. Law firm Lindabury writes that “Monthly financial statements, departmental profitability, budget-to-actual reporting, cash flow forecasting, and EBITDA calculations should be standard practice well before a transaction is contemplated.”

Lindabury wrote for healthcare companies, but the point holds for any business services company. Buyers price your company on EBITDA, so they want proof that the number is real. Two steps help most:

1. Close the books every month, within a few weeks of month end.
2. List the one-time and owner-specific costs that a buyer should add back. Our glossary explains add-backs and adjusted EBITDA.

Expect the buyer to hire an accounting firm to check your numbers. Our post on how to get ready for a quality of earnings report shows what that review covers.

Does your revenue look safe to a buyer?

Revenue looks safe when it repeats and when no single customer can hurt you. Axial reports that “Recurring revenue reflects customer loyalty and long-term demand.”

Axial also says that “As a rule of thumb, PE firms try to avoid businesses where more than 10% of their revenue comes from one client, or more than 25% from their top five clients.”

Treat that rule as a rough guide from one adviser, not a rule every firm follows. Still, check your own list. Add up the share of revenue from your largest customer and from your five largest. If either number looks high, signed contracts and longer terms reduce the worry.

Can your team run without you?

Your team is ready when it can make daily decisions without you. A buyer backs people as much as a business. Capstreet’s own phrase is a “tenured team of owners or managers.”

If every key decision still runs through you, a buyer sees risk. Our post on why private equity wants a team that runs without you goes deeper, with steps to take now.

Will you keep part of your company?

Often, yes. Capstreet publishes “Primarily majority investments” and “Entrepreneurs reinvest alongside Capstreet.” A buyer usually takes control, and you reinvest part of your proceeds and share in later growth.

That structure is why readiness covers more than size. A partner who takes a majority stake needs to trust the numbers and the team you will leave in place. It also needs you to want a long relationship. Learn how the reinvested share works in our post on what is rollover equity, and weigh the options in majority or minority recapitalization.

What if you are close but not ready?

Most owners are close but not ready. That is normal. Use a 12 to 24 month plan:

1. Fix the monthly close and the reporting.
2. Write down who owns each major task.
3. Spread revenue across more customers.
4. Write a one-page growth plan.
5. Learn the terms you will see, such as rollover equity and majority recapitalization.

A first call can happen sooner than you think. A conversation does not commit you to anything, and it helps you learn what a buyer would want to see. For the full path, read our guide on how to prepare your company for a private equity sale and our page on selling your business to private equity.

Next step

Read the full deal criteria and compare them with your checklist. When you want a confidential conversation, contact Capstreet, call 713-332-2700 or email connect@capstreet.com.