Selling Your Business to a Private Equity Group


Bill Grunau

The United States is home to thousands of private equity firms, a number estimated to be over 4,500, along with more than 14,000 private investment firms. In 2022, the private equity market experienced a deal frenzy with a record-breaking $920 billion worth of transactions across 8,845 deals. This figure may even be underestimated, as it possibly excludes smaller firms and transactions. Interestingly, despite this unprecedented activity, private equity firms are still sitting on an impressive $2 trillion in cash reserves, a 21% increase from the previous year. With the Federal Reserve’s rate hikes now taking a backseat, experts predict the merger and acquisition (M&A) pace to pick up significantly in the second half of 2023.

Who Qualifies for Acquisition by a Private Equity Group? For business owners contemplating selling their company to a private equity group, understanding the criteria for qualification is crucial. Most equity groups require a minimum earnings threshold of $1.5 million in EBITDA, although some may accept businesses with earnings as low as $1 million. However, it’s important to note that the actual minimum earnings threshold depends on the type of business and whether it aligns with the equity group’s existing portfolio. For example, if an equity group already has a platform company in the HVAC industry, they might consider acquiring HVAC businesses with earnings below $1 million EBITDA. Consequently, businesses with earnings above $1.5 million EBITDA are strong acquisition candidates with Private Equity Groups. Even those with earnings below this threshold can be considered if they operate in industries targeted for growth through acquisition, where smaller companies are consolidated (rolled up) under a platform company.

Selling Your Business to a Private Equity Group – The Process: Selling your business to a private equity group requires a strategic approach. The first step is making your company visible to potential buyers. While equity groups actively seek businesses in their target industries, standing out in a sea of business-for-sale listings can be challenging. Pacific Business Sales offers a solution, confidentially presenting your business to hundreds of highly qualified equity groups interested in your industry. With a well-established reputation and an extensive email list dedicated to private equity groups, we also leverage a private website marketplace exclusively accessible to equity groups, further increasing exposure for suitable businesses.

Deal Terms and Considerations: Typically, private equity groups rely on a combination of cash and debt financing for most acquisitions, and rarely all-cash deals. Equity rollovers and buybacks are common transaction structures, allowing sellers to retain stock in the company or invest in the new entity. Additionally, earnouts may be included in premium-priced deals or situations where high growth or near-term projections pose uncertainty. A seller note, involving some seller financing, is also frequently part of the deal.

Due Diligence – Ensuring a Smooth Process: Before closing a deal, private equity groups engage in a thorough due diligence process. This includes obtaining a Quality of Earnings (QofE) report from a CPA firm, as well as legal due diligence conducted by an attorney. Additionally, commercial due diligence investigates the company’s market, competitive position, technology, market forecast, and projections. While the entire due diligence process can take between 60 to 90 days for larger transactions, its completion is a crucial step in ensuring a successful sale.

Working with Private Equity Groups: Transacting with private equity groups requires a different approach compared to selling to individual entrepreneurs. To navigate this process successfully, business owners benefit from working with experienced business brokers. The team at Pacific Business Sales specializes in handling small to mid-sized business sales to equity groups, understanding their unique transaction processes, and structuring deals for the best possible terms.

Conclusion: The private equity market in the US continues to thrive, offering significant opportunities for selling businesses to interested equity groups. Understanding the criteria for qualification, preparing for the sale, and working with experienced professionals can ensure a seamless and successful transaction for business owners looking to take the next step in their entrepreneurial journey. For more information on selling your business to a private equity group, contact Pacific Business Sales today.

Bill Grunau

About the Author

Bill Grunau

Bill has over 20 years of experience as a Business Broker specializing in industries ranging from manufacturing to construction/contractors, technology and software, B2B services, distribution-3PL, and healthcare. His transaction experience includes successfully closed transactions as both stock sales and asset sales including transactions with licensing such as contractors, healthcare, and companies with government contracts in Orange County and other Southern California locations. Bill works closely with a team of financial advisors specializing in tax strategies to minimize taxes on the sale of a business and are available to advise clients on how to minimize the tax liability on the sale of their business. Bill is the author of “Own Your Future, Straight Talk about How to Buy a Business and Build Your Future” Bill has a BS in Electrical & Electronic Engineering studying at Cal Poly Pomona and West Coast University and also studied at Claremont Graduate school EMBA program.