How Does Private Equity Work? And How Do You Get It Interested in Your Business?

If you’ve managed to catch the eye of private equity (PE), it’s likely because these funds see immense value in your business in ways you might have never expected. 

Acquisitions by PE are heating up globally across all sectors. Investors love the alternative asset class consistently bringing back 10 percent plus in annualized returns. And because of their vast networks and pools of resources, PE firms can help portfolio companies reach massive, profitable exits.

When PE decides to buy out or acquire a majority stake in your company, it frequently offers you a lucrative sale price to ensure you sell to them. So what exactly makes your online business stand out to private equity and how can you get them to notice you?

We want to help you understand a few things about private equity including:

  • How private equity works and what they like to buy.
  • Why you might want to look for a private equity exit.
  • How to get your business noticed by private equity.

Let’s get into it.

What Is Private Equity?

Private equity is a term for investment partnerships that buy, manage, and sell companies.

Private equity has three parts:

  1. A pool of funds gathered from limited partners (LPs) like high net worth individuals, pensions, endowments, family funds, and foundations.
  2. A company, often referred to as the general partner (or GP), that manages and invests this pool of funds. Usually, it will throw a percentage of its funds into the pot and take a management fee for its efforts. This is around two percent of the pot’s value.
  3. A portfolio of businesses purchased or invested in by the PE fund.

Private equity investors are usually wealthy people or large institutions the GPs have solicited for investment. PE investment requires substantial capital (as much as $25 million per investor) with a return horizon of five to seven years. These aren’t get-rich-quick schemes and investors are institutional, not retail traders on an app.

Since PE firms typically work with LPs like pension funds, insurance companies, and even banks, these funds appreciate a safe bet. Should they lose money, monumental financial institutions could collapse.

Who Does Private Equity Usually Invest In?

Private equity typically acquires private or public companies in their entirety or at least aims for a controlling stake. For particularly large buyouts, it might even team up with other private equity funds as a consortium.

For all businesses acquired by PE and especially for lower middle-market businesses or ones in an untested new field, it will always look for the following:

  • A profitable business model
  • Paying customers that have the capital to keep paying. PE particularly likes B2B businesses for this reason.
  • Opportunities to scale quickly
  • Growing industries
  • Ability to benefit from greater professionalization
  • Management teams that actively improve business performance and efficiency
  • Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of one to two million dollars

PE prefers not to hold stakes in companies that remain listed on a stock exchange but instead take them private via share buybacks.

Here are some typical PE investment strategies:

  1. Venture capital (VC) investments – Investments in startups hoping they’ll become the next Facebook, Amazon, or Apple and make massive returns.
  2. Growth capital – Investing funds in target companies to help them grow (before an eventual sale). This is similar to VC but generally requires your business to be doing well financially already.
  3. Mezzanine financing – The PE firm gives a promising company a loan with the promise of controlling equity if not repaid. This puts slightly more risk onto your business.
  4. Leveraged buyout (LBO) – Popular in PE, this is where a firm borrows money to buy a company and then uses revenue and an eventual sale of the acquired company to pay off debt. It’s relatively low-risk for PE firms, however, failed LBOs resulting in gutted businesses have soured the public’s image of PE.
  5. Special situation funds – Any funds lying outside the norm for PE. For example, PE giant, Blackstone, announced a special healthcare-focused fund in 2021 where it focused on buying businesses across the entire lifecycle of pharmaceuticals – from research to development to distribution.

Most of the above methods apply to acquiring large brands with traditional business models – retail, hospitality, logistics, etcetera. Online businesses and mid-market businesses may require slightly different approaches.

Today, PE firms are increasingly interested in online business. They both have precisely what the other needs. Online businesses with low overhead costs can scale much more quickly if given enough capital to do so. And PE, with its seemingly limitless capital, wants investments that can scale well beyond the first fundraising round.

What Are the Benefits of Selling to Private Equity?

Why would you want to catch the eye of private equity?

You know that:

  • Private equity has lots of money to invest.
  • It likes to acquire companies to bolster the services of other portfolio companies.
  • It likes to bet safely on businesses that already perform well.

If you intend to exit your business entirely and start over, a total buyout is your most promising scenario. Private equity may allow you to completely exit your business if it’s only interested in your assets (like a SaaS tool) or feel it can restructure your company better without you.

On the other hand, many PE firms would much rather take a majority stake in your business while allowing you and your leadership to continue running it until a future exit. While this may not be your ideal scenario, you may be impressed by some of the benefits of a PE acquisition. 

By continuing to work under PE ownership, you get the potential for two liquidation events. One when PE buys into your business and another when it sells your business again. Here are some of the other benefits of running a business that has been invested in by PE.

Access to Capital

Besides the capital PE gives you for its stake in your business, it can also invest in your business to give it the capabilities of a much larger one. Tired of paying for a small SaaS startup’s service? Consider lobbying your investors for funds to buy the company. Because PE will have a controlling stake in your business, anything that increases your value helps them too.

Operational Expertise

While writing for Bootstrappers, entrepreneurs often told me that building a product by themselves was a lonely experience.

Many lacked knowledge in other aspects of their businesses and didn’t know where to go for advice. They might have been well-versed in marketing but had next to zero HR or operations skills.

Private equity firms, however, typically have experienced professionals in their networks who can provide guidance and expertise in your field. Once you work with a private equity firm, you access their industry experts, advisors, investors, and other professionals and acquired businesses. This helps you connect with potential customers, suppliers, partners, and more.

What Do Private Equity Firms Do With Companies That Are Acquired?

Private equity is primarily interested in one thing: a return on investment. It’s a GP’s duty to their LPs to make money and they need the profits to fund their firm.  Usually, this ROI is through an eventual sale netting them more money than they spent acquiring it.

A PE fund generally will exit using one of these methods:

  • Initial public offering (IPO) – Selling shares of your business publicly on the stock market.
  • Strategic sale – Selling shares of your company to another company in your industry.
  • Secondary sale – Selling your business to another private equity firm.
  • Recapitalization – Raising additional funds through loans or additional shares to buy themselves out while retaining ownership.

To reach these goals, it will usually hold your business for several years and try to improve or streamline its operations. It might also try adding new revenue streams.

One example was a semi-recent SaaS acquisition in 2022 by Chicago-based PE giant, Thoma Bravo. It helped one of its portfolio companies, Imprivata, a healthcare data security business, acquire secure data connection business, SecureLink. Thoma Bravo acquired Imprivata in 2016 for approximately $544 million. 

SecureLink was a platform that allowed its customers to provide secure remote access to internal networks for vendors and clients. Most of its clientele was also in the healthcare industry.

With the help of its investor, Thoma Bravo, Imprivata acquired SecureLink, raising the combined company’s valuation to $3.5 billion. While the SecureLink acquisition amount was undisclosed, Thoma Bravo made over 600 percent return on its 2016 investment through the acquisition.

How to Find Your Private Equity Exit

Attracting PE to your business involves meeting their acquisition criteria and getting in front of GPs. 

How to Make Your Business Desirable to PE

We mentioned above some of the general traits PE likes in an acquisition target. Here we’re going to list some more specific examples you could use to attract acquisition.

  • A profitable business model – Your business may be doing well now, but it needs to remain profitable with high margins for PE to want to step in. If your costs are eating most of your profits, find ways to cut them back. If you see any future regulations, price hikes, or other roadblocks coming to your industry, proactively find ways around them.
  • Growing revenue or recurring revenue – Are your customers making repeat purchases or are you constantly chasing new markets? Consider exploring new customers or tweaking your offering to guarantee recurring revenue. Otherwise, create an automated system for acquiring new customers.
  • Growing industries – If you’re building in a saturated industry, especially one that’s at risk of increased competition and regulation, consider changing course. See if there’s any way you can specialize your product or service to stand out.
  • Ability to benefit from greater professionalization – Perhaps PE’s greatest offering is its expertise in traditional management practices. A business on the cusp of becoming more internally specialized (rather than run by a small team that does everything) is highly desirable to PE firms.
  • Management teams that actively improve business performance and efficiency – If your founding team has trouble managing operations, you might want to look for a superstar COO, CMO, and more to attract PE. Usually, it wants a strong core team to keep operations running.

Read our article on how to know the right time to sell your startup for more tips.

How to Find Private Equity Firms to Buy Your Business

You don’t call most PE funds – they call you. PE identifies potential acquisition targets through personal contacts, industry research, and investment bankers. Once it has identified your business as a potential target, funds managers will contact your management team and express interest.

However, that doesn’t mean waiting around and hoping to get noticed. There are a few methods you can use to gain attention from PE.

  • List on an online marketplace like – Take it from us, private equity searches everywhere for new businesses to acquire. Listing your business for sale on an online platform with 100,000s of buyers all but guarantees someone from PE will see it.
  • Hire a financial advisor or investment banker – If you want to take the old-fashioned route (and pay for it), a financial advisor or investment banker can help you identify potential private equity buyers in their network.
  • Put in the legwork – There’s a reason tech companies move to the Bay Area: It’s much more likely you’ll run into someone in private equity. Check through online databases, industry publications, and professional networks to identify private equity firms specialized in your industry. Attend industry conferences and events that you think these people might attend.

Just remember, a private equity exit isn’t in the cards for everyone and it’s possible to secure deals that are just as beneficial for you and your business. 

For more inspiration on how to sell your business profitably, read our articles on how to attract more buyers and how to exit your business for a high sale price.

Sign up for your seller account today to get your startup in front of 200,000+ buyers.

How Long Does a Private Equity Investment Typically Last?

Private equity investments tend to last anywhere from five to ten years. Many funds spend as much as four to six years selecting and locking in investments followed by another four to six years of holding them. Sometimes, investments are triggered to end early or extended if a majority agrees.

What Is the Typical Return on Investment For Private Equity?

BlackRock’s (not to be confused with PE giant, Blackstone) central expected return for private equity as an asset class is 11.2 percent over the next 10 years. That’s slightly lower than the S&P 500’s calculated 11.8 percent return since inception but still considered an excellent rate of return.

Where Are the Best Private Equity Firms Located?

New York City is the top location by volume, hosting several large firms like Blackstone, KKR, General Atlantic, and Insight Partners. There are also notable firms out in San Francisco (a hotspot for venture capital) and international hubs like London and Paris.

Will Private Equity Let Me Sell My Business?

Private equity’s ultimate goal is always to sell your business. However, it usually requires a certain ROI from the sale to justify its investment. You may need to negotiate heavily with your controlling PE managers if you wish to sell before they’ve reached their desired sale amount.

What Is a Dream Exit For Private Equity?

Private equity typically aims for a 12 to 25 percent return on investment. Generally, PE returns peak around the three-year mark and then fall towards 12 percent in every subsequent year it holds a business. Usually, it aims to sell as close to that 25 percent mark as possible.

The content on this site is not intended to provide legal, financial, or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of a tax advisor before filing your taxes or conducting tax-related operations. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any tax professional.

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