How to sell your business to private equity

What does it mean to sell your business to private equity?

You sell a controlling share of your company to an investment firm. The firm pays you in cash and often asks you to keep part of your equity. Then it works with you and your team to grow the business and sell it again later.

A private equity firm raises money from investors and buys companies. It does not plan to hold them forever. First Citizens says firms “typically operate on a 3- to 7-year exit horizon.” That shapes everything: the price, the structure and the pace of change after the close.

This is different from handing the keys to a competitor. It is also different from a bank loan. You become a partner with a firm that has a job to do, and you keep a stake in the result.

Private equity can fit if you want to take money off the table, keep building, and share the load. It fits less well if you want a clean exit with no ties. We cover that choice in Private equity vs strategic buyer.

Who is a good fit for a private equity partner?

A good fit is an owner who wants liquidity now and still wants to help the company grow. You also need a company with steady earnings and a team that can run without you every day.

Ask yourself these questions:

• Do I want to keep working in the business for three to five years or more?
• Do I trust a board and a partner to share big decisions?
• Do I want some money now and a second payout later?
• Is my management team ready to take on more?
• Do I want my company to keep growing, even if that means change?

If you said yes to most, private equity is worth a real look. If you want to leave in a few months and have nobody to hand off to, a different path may be better. Our guide to business succession and exit options compares those paths.

Capstreet describes its own target in plain terms. It looks at “entrepreneur-owned businesses services companies” with “$3 to $15 million of EBITDA.” It also says it looks for “a tenured team of owners or managers seeking a majority capital partner.” You can read the full criteria on our deal criteria page. Capstreet’s size band fits what the industry calls the lower middle market. Our lower middle market private equity page explains that term.

What do private equity firms look for in a company?

Firms want proof that your earnings will last and room to grow. Capstreet lists “solid financials, a defensive business model, untapped growth potential, and competitive advantages within their market niche.”

Each firm sets its own rules. Use this table as a starting point and then check any buyer’s published criteria.

EBITDA is the profit measure most buyers use. They often adjust it with add-backs, such as one-time costs. Read how private equity values a business to see how that works.

How does the process work, step by step?

Most sales move through an intro call, a data request, a letter of intent, due diligence and a close, after you do your own prep. Each stage ends when both sides choose to go on.

The eight steps below follow the process one private equity firm, Alpine Investors, publishes for owners. Every buyer differs, so ask yours to describe its own process.

1. Decide to sell and set your goals. Know why you want to sell, how much you need, and what role you want afterward. Bring your tax adviser and your lawyer in now.
2. Prepare your company. Pull together three years of revenue by product or service, net income and your key metrics. Our guide on how to prepare your company for a private equity sale gives a checklist.
3. Hold an intro call. You tell your story and your goals. The firm explains how it works. You both decide whether to go on.
4. Answer the data request. The firm asks for key financial data such as profit and loss statements. You can sign a non-disclosure agreement first. Alpine says “Our team will send you a request for data on your company.”
5. Meet in person. Use this to test the people, not only the numbers.
6. Review the letter of intent. The letter of intent states a proposed purchase price, subject to due diligence. It often starts an exclusivity period. Read our letter of intent guide.
7. Complete due diligence. The buyer checks your numbers, operations, tax, people and contracts. A quality of earnings report is common. Use our due diligence checklist for owners.
8. Sign and close. Both sides sign the purchase agreement, funds move, and the deal closes.

Here is how the five main stages compare.

Alpine states that once the letter of intent is signed, “we will usually enter an exclusivity period during which you cannot entertain other acquisition proposals for some period of time.” Treat that clause with care. Negotiate its length before you sign.

How long does it take?

There is no fixed answer. The time depends on how ready your records are, how many buyers you talk to, and how deep diligence goes. Capstreet has not published a timeline, so ask each buyer for its own.

Here is what outside sources say. First Citizens says diligence “is often rigorous and can consume a considerable amount of time from you and your executive team.” Parkland, an adviser focused on recapitalizations, says recap closings “typically run 3 to 6 months from LOI.” That number is for recaps, and it is one firm’s view.

Three things slow most deals down:

• Financial records that need cleanup
• A quality of earnings review that finds adjustments
• Late talks about your role or how much equity you will keep

You control the first one. Start early. Our guide on how to prepare your company covers it.

How much do I get at close, and what do I roll over?

Your price comes in parts: cash at close, equity you keep, and sometimes a payment later if the company hits targets. The split matters as much as the headline price, so ask each buyer for it in writing.

Here are the three common parts.

Rollover equity is often called a second bite of the apple. You get paid now, and you get paid again when the firm sells. The value of your rolled stake can rise or fall with the business. Read the full detail in our rollover equity guide.

How big is the roll? Third parties give ranges, not rules. Parkland says the “Founder typically rolls 20% to 40% into the new capital structure” in a majority recap. Capstreet says “Entrepreneurs reinvest alongside Capstreet” and that in many deals, “founders are expected to roll over a portion of their equity and continue as investors in the business.” It has not published a percentage.

On earnouts, Cantrell Law says “Most earnouts last between one and three years.” Our earnout guide shows how to protect yourself.

What about price? CapitalPad, summarizing GF Data, reports that “Lower middle market EBITDA multiples generally increase with company size, although individual size tiers can move against that pattern.” Your multiple depends on your size, growth, margins and customer mix. See EBITDA multiples in the lower middle market.

Taxes can change what you keep. A rollover may be taxed differently from cash. Ask your own tax adviser and lawyer to review the structure before you sign the letter of intent.

What happens to my team, my brand and my role after the sale?

You usually stay involved, but your job changes. You answer to a board, report on a set schedule, and share big decisions. Your team can grow if the firm backs a growth plan. Nobody can promise every job.

Capstreet’s own post, “What Really Happens After Selling to Private Equity,” says new owners bring “boards, reporting cadences, and operational check-ins.” It says you will “likely begin participating in monthly operational meetings, quarterly board meetings, and setting objectives and key results (OKRs) and key performance indicators (KPIs).”

On your people, Capstreet writes: “While no one can guarantee long-term certainty for every individual role, we believe the type of investment partner you choose can significantly influence the opportunities available to your team.” It adds that it is “a growth-oriented private equity firm, which means we typically invest in healthy, high-potential companies.”

On your role, Capstreet says to talk about “your Day 1 role post-close, and how you see your involvement evolving over the next three to five years.” Do that before you sign, not after.

Brand and name differ by deal. Ask the buyer directly whether it plans to keep your name, your offices and your key managers. Put the answer in your notes and, where it matters, in the contract.

For retention tools, see our guide on retaining management and key employees. For the first months after the close, read what to expect after you sell and the Capstreet post on what really happens after selling to private equity.

What are the risks, and how do I check a buyer?

The main risks are loss of control, pressure to hit targets, culture change and debt. You check a buyer the way it checks you: ask hard questions, call references and read the documents.

First Citizens lists these risks: reduced control, pressure to deliver, an internal culture shift and increased financial risk. It notes that “Many PE transactions are financed with debt that’s placed on the company’s balance sheet.”

Use this table to turn each risk into a question.

First Citizens also advises you to “Ask for references from founders of companies they’ve acquired.” Do that. Then compare what you hear. Our guide on how to choose a private equity partner has a longer list.

Diligence runs both ways. Read the holding period in the documents, the governance terms and the rights attached to your rollover. Your lawyer should review all of them.

Do I need a banker or advisor?

Most owners benefit from a team. A lawyer and a tax adviser are close to essential. An investment banker can help you reach more buyers, set the price and run the process.

A banker costs money and takes time, and not every company needs one. A direct talk with one firm can work if you already know your goals and your price range. A banker helps most when you want several offers to compare.

Whatever you choose, do not go alone on the legal and tax pieces. Our guide on working with an investment banker or advisor explains how to decide.

How do I prepare 12 to 24 months before a sale?

Start with your numbers, then your team, then your story. A buyer pays more for clean books, a deep bench and a clear plan for growth. These steps take months, so start early.

Use this timeline as a general planning guide. It is not a Capstreet requirement or process.

Our full checklist is in how to prepare your company for a private equity sale.

Is private equity right for me, or should I sell to a strategic buyer?

It depends on what you want. A strategic buyer, such as a competitor, often pays for synergies and may fold your business into its own. Private equity pays for cash flow and often keeps your team in place.

The Accounting Department puts it this way: “Strategic buyers typically pay a premium for synergies and often absorb your company into their existing operations, while private equity firms pay for cash flow potential and usually keep management in place to grow the business further.”

You can mix them. Some owners run a process that includes both. See the full comparison in private equity vs strategic buyer. If you want to keep some ownership and take cash off the table, also read about recapitalization.

Next step

If your company fits Capstreet’s criteria, read our deal criteria page and see whether we are a match. Then ask for a confidential conversation at Contact, by phone at 713-332-2700 or by email at connect@capstreet.com.