Exits, Uncategorized, Valuation

Private Equity Exit

A private equity exit is the sale of your company (or a company) to a private equity (PE) firm.  PE firms are usually partnerships that are comprised of many shareholders that have pooled investment dollars, invested them into the acquisition and growth of privately held companies, and have a very specific goal of beating the average annual returns of the stock market index, which are typically in the 7-8% per year range.

PE firms consolidate around industry verticals and use a variety of strategies to produce returns on investors dollars.  The point here is that these firms are often potential acquirers for privately held companies, and so looking at this as a potential exit is often worth considering.

A private equity firm will have a goal of making a return on its cost of acquisition and as such, in valuing your business, will look closely at cash flows, overall profitability, and growth potential.


Cash flows — Simply stated, this is the business’s ability to generate accessible cash in the form of profit on a monthly and annual basis.  Free cash flow is what is used to pay back an investor, and maximizing this has the potential to increase company valuation.


Profitability — This is similar to cash flow but is the overall profitability of the business, including taxes and any owner discretionary perks or other overhead items that are expected to be removed after an acquisition.  Be sure to itemize these and claim them as an add back to overall valuation, as this will help improve acquisition price.


Growth potential — This is crucial, as a PE acquirer will want to accelerate the rate of return on invested capital as quickly as possible.  Seeing how your company can grow and that you have very specific growth plans will generate acquisition interest, as well as increase overall valuation of your company.   Additionally, expect to stay on for at least two years to ensure these growth goals are hit, and expect your valuation and buyout payments to be tied to these goals.

The type of negotiation in a sale to a private equity buyer is usually on the side of the PE firm, favoring their ability to generate options (where you only have one company to sell).  It’s important to not be married to this form of exit, and if the deal terms aren’t just right, be sure you’re OK to walk away.

Realize too that in the sale to a third party, and particularly a private equity firm that plans to grow your company and maximize its return, you will no longer have control of the business, operations, etc.   Generally, a PE firm doesn’t want to run your business, but expect tight scrutiny on quarterly performance. If things are off, expect the PE firm to impose budget cuts and even insist on management changes, inserting personnel they trust.  

This type of exit is not for the faint of heart, and you will certainly earn your acquisition price.  However, selling one’s company is a triumph of its own, and so if you do find yourself in a circumstance where you get a great offer and see that it can be successful, definitely consider it and be sure to congratulate yourself.

If you are wondering what alternative exit strategies exist consider the following:



Sell to a strategic buyer


Sell to a financial buyer