What Do Private Equity Firms Look For in Acquisitions?

Private equity firms are the most active buyers of small to mid size businesses in America right now. If your business generates $1M or more in EBITDA, there is a very good chance that multiple PE firms would be interested in acquiring it. But PE firms are selective. They look at hundreds of businesses for every one they buy.

Here is exactly what they evaluate, what makes them write a check, and what makes them pass.

The PE Buy Box: Minimum Requirements

Before a PE firm spends a single hour evaluating your business, they run it through their "buy box" criteria. If you do not fit, they move on immediately. The typical lower middle market PE buy box looks like this:

• EBITDA: $1M-$5M minimum for platform acquisitions. $500K+ for bolt ons.
• Revenue: $3M-$20M (varies by industry)
• Industry: Service businesses, manufacturing, healthcare services, technology enabled services, and specialty distribution are the most popular
• Geography: Most PE firms target specific regions. Texas is one of the most active PE markets in the country.
• Revenue trend: Growing or stable. Declining revenue is typically a dealbreaker.
• Years in business: At least 10 years of operating history preferred

The 6 Things PE Firms Really Care About

1. Management Team Depth

This is the number one factor, full stop. PE firms are not buying your business to run it themselves. They need a management team that can operate the business without the owner. If you are the CEO, the head of sales, and the lead estimator all rolled into one, PE firms see a risk, not an opportunity.

The ideal scenario: you have a general manager or COO, a sales manager, and an operations lead who can run the day to day while you focus on strategy. If you do not have this team today, building one over the next 12 to 18 months can dramatically change how PE firms value your business. Read more about reducing owner dependency.

2. Recurring or Repeatable Revenue

PE firms love predictable cash flow. The more of your revenue that is recurring (contracts, subscriptions, maintenance agreements, retainers), the higher your multiple. Here is a rough guide:

• 70%+ recurring revenue: Premium multiple (5x-7x)
• 40-70% recurring: Strong multiple (4.5x-6x)
• Under 40% recurring: Standard multiple (3.5x-5x)
• Project based / one time: Lower multiple (3x-4.5x)

If your HVAC company has 1,000 maintenance contracts generating $1.2M per year, that recurring revenue base is worth more per dollar than $1.2M in one time install work.

3. Growth Runway

PE firms are not buying your past. They are buying your future. They want to see a clear path to doubling or tripling EBITDA within 3 to 5 years. Common growth levers they look for:

• Geographic expansion into adjacent markets
• New service lines or product additions
• Bolt on acquisitions of smaller competitors
• Pricing optimization (many small businesses undercharge)
• Sales team buildout (adding dedicated salespeople)
• Technology and automation improvements

When you present your business to PE, you are not just showing them what you have done. You are showing them what they can do with it. A strong growth story can add 1x to 2x to your multiple.

4. Low Customer Concentration

If your top customer represents more than 15-20% of total revenue, PE firms get nervous. What happens if that customer leaves after the acquisition? The ideal customer profile for a PE acquisition:

• No single customer above 10% of revenue
• Top 10 customers represent less than 40% of total revenue
• Long standing customer relationships (5+ years)
• Contracts or recurring purchase patterns

5. Clean Financials

PE firms employ financial analysts who will tear apart your financials during due diligence. They expect:

• Three years of tax returns that match your internal financials
• Clean add backs with documentation
• EBITDA margins that are consistent or improving
• No major one time items that inflate current year performance
• Working capital that is sufficient and well managed

If your books are messy, a PE firm will either pass entirely or use the uncertainty to negotiate a lower price. Having a professional CIM with clean financials sets the right tone from day one.

6. Defensible Market Position

PE firms want businesses with a "moat," something that protects you from competition. This could be:

• Proprietary products or technology
• Long term contracts with switching costs
• Licenses or certifications that are hard to obtain
• Brand reputation built over decades
• Geographic density (you dominate your local market)

Platform vs. Bolt On: What Is the Difference?

If your business could be a platform (strong management, good systems, $2M+ EBITDA), you command a premium. If it is better suited as a bolt on (smaller, owner dependent, limited geography), the multiple is lower but you gain access to PE buyers you would not otherwise attract.

How PE Structures Deals

PE deals look different from SBA deals or strategic acquisitions. A typical PE deal structure:

• 70-80% cash at close
• 10-20% seller equity rollover (you retain a minority stake and sell it again when PE exits in 3 to 5 years, often at a higher multiple)
• 5-10% earnout or holdback tied to performance metrics
• Employment agreement: 2 to 3 year commitment at a market salary

The equity rollover is often where sellers make their "second bite of the apple." If you sell at 5x and the PE firm grows the business and exits at 8x, your rolled equity grows proportionally. Some sellers make more on the rollover than on the initial sale.

What to Expect in PE Due Diligence

PE due diligence is more thorough than SBA or individual buyer diligence. Expect 60 to 90 days of deep analysis across:

• Financial DD: Detailed review of 3 to 5 years of financials, quality of earnings analysis, working capital analysis
• Operational DD: Site visits, process reviews, capacity analysis, technology assessment
• Commercial DD: Customer interviews, market sizing, competitive analysis
• Legal DD: Contract review, litigation history, employment law compliance, environmental
• Management DD: Interviews with your leadership team, organizational assessment

How Kingdom Broker Matches Sellers with PE

At Kingdom Broker, our AI powered buyer matching system maintains a database of active PE firms, their buy box criteria, industry focus, and geographic preferences. When we bring a business to market, we identify the 10 to 20 PE firms most likely to pay the highest price for your specific business.

We do not post your business on a listing site and wait. We run a targeted, confidential outreach process that puts your CIM directly in front of decision makers at the right firms. This creates competition among buyers, which is the single most effective way to maximize your sale price.