Are you looking to sell your business for a lucrative private equity exit? Before approaching private equity firms, you need to make sure your business measures up.
With over $4 trillion in undeployed capital and 8,000+ PE firms actively seeking acquisitions, private equity represents the largest market for exiting a business at a high valuation. However, the vast majority of businesses lack the fundamentals needed to attract PE interest and investment.
In this comprehensive guide, we will cover the 15 main reasons why private equity passes on acquiring businesses. We will outline what you need to fix or optimize in order to make your company as attractive as possible for a private equity exit.
1. No Profitable, Growing Business and Sustainable Growth Story
The most obvious requirement is that your business must be profitable and demonstrating consistent growth. Private equity wants to see strong financials today along with a believable strategy and model to facilitate growth well into the future.
When PE firms pay high multiples on profitability metrics like EBITDA, they are banking on acquiring your future earnings over the next decade or longer as much as your present day performance. If you lack either profitability or a sustainable path to growth, private equity will take a pass.
How to fix it:
- Achieve consistent profitability month-to-month
- Model out and execute against a scalable growth strategy
- Bring on a management team that can drive growth predictably over long time horizons
2. No Differentiated Brand
Private equity wants to acquire brands that stand out from the competition. Companies with true differentiation can charge premium pricing, earn customer loyalty through a superior product/service, and sustain high growth rates within their addressable market.
If your brand lacks any competitive edge or unique value proposition, you risk languishing as a commodity business. In commoditized markets with lots of undifferentiated competition, players inevitably get dragged into a “race to the bottom” on pricing to retain and gain share. This destroys value over time.
How to fix it:
- Identify your brand’s points of differentiation
- Sharpen messaging and positioning around what makes you unique
- Invest in product/service innovation and IP protection
3. Over-Reliance on the Founder
Private equity needs to buy companies that can operate successfully without the founders involved day-to-day. After acquiring your business, they expect founders and other key executives to step away.
If the founder currently leads too many core functions like strategic leadership, sales, marketing, operations and service delivery, the company lacks adequate infrastructure. Removing the founder introduces too much execution risk for PE buyers.
How to fix it:
- Hire or develop leadership talent to delegate core business functions
- Document founder’s tribal knowledge, network and relationships
- Incentivize and retain key personnel under new ownership
4. Lack of Strong Supporting Talent
Beyond the executive team, private equity looks for seasoned talent deeper in the organization that can operate and grow the business. If too many mid-level roles lack qualified leaders that understand the industry and functions deeply, it raises concerns.
Certain supporting roles become especially important depending on your business model. For example, technical execution risk for product companies or integration risk for highly acquisitive roll-up plays.
How to fix it:
- Assess experience/capabilities below leadership level
- Identify business model-specific specialist roles beyond C-suite
- Recruit highly qualified VP and Director-level talent
5. No Defined Culture
Culture encompasses the collective behaviors, attitudes, values and performance ethic that shape a workplace environment. Private equity understands that culture directly impacts their ability to grow a business.
Toxic culture creates substantial risk. Rumors of cultural dysfunction ultimately tanked valuations of high-profile startups like WeWork and Uber as they prepared to go public.
Conversely, healthy and aligned cultures enhance scalability, consistency and damage containment. PE firms prize cultural cohesion.
How to fix it:
- Identify and codify cultural values and behaviors
- Align recruiting, incentives, reviews and promotions to stated cultural values
- Expose the leadership team to best practice cultures
6. Founder-Dependent Marketing, Sales and Delivery
Certain functions represent the lifeblood of any company. These include customer acquisition, selling products/services, and fulfilling what you sell. Founders often originally spearhead these processes before transitioning them to other leaders.
If you as founder still directly control marketing, sales or delivery, private equity will see this as a liability. The continuity of these functions needs to be provable without your direct oversight.
How to fix it:
- Hire or promote marketing, sales and delivery heads to leadership team
- Invest in infrastructure, systems and processes to scale each function
- Set up standardized reporting on funnel metrics as founder steps back
7. No Predictable & Measurable Customer Acquisition
Private equity wants assurance that your customer pipeline will continue filling predictably after they acquire you. Unpredictable or inconsistent access to customers is an Achilles heel.
Ideally, you have diverse lead generation channels with clear measurement tagging sales/marketing efforts to costs to leads. Data-driven attribution builds confidence you can scale strategically. Reliance on a single channel or black box process does not.
How to fix it:
- Audit lead generation and sales conversion performance
- Build personas and model target customer acquisition costs
- Launch and iterate multiple lead generation channels
8. No Recurring Revenue or Low Churn Model
Subscription and usage-based revenue models create predictable growth and customer lifetime value. One-off sales often prove more volatile quarter-to-quarter and require continually investing to fill sales pipelines.
Low churn means optimizing pricing, customer success, account expansions, renewals and upsells to minimize customer losses. High churn necessitates filling constant sales gaps just to stand still.
How to fix it:
- Build recurrence with subscriptions, bundling, etc.
- Measure and improve net retention rate
- Invest in customer success and account management
9. Revenue Concentration Risk
Concentration risk refers to outsized dependence on one or a few customers for the majority of sales. For example, if one large contract drives 50%+ of revenue and profitability.
This introduces vulnerability. Losing one big customer sends the entire business reeling. Private equity understands this as a risk factor clouding future performance.
How to fix it:
- Limit customer concentration to <20% of sales
- Expand totals number of customers
- Diversify across customer segments and verticals
10. No Documented Systems and Processes
Private equity judges a business on both its people and its processes. You need documented systems, SOPs, workflows, automation and technology infrastructure that allow business to run predictably at scale.
Undocumented tribal knowledge fails to transition or lifts performance as the company grows. Ad hoc workflows also introduce unwanted variability into customer experiences.
How to fix it:
- Map core business workflows from lead to fulfillment
- Build playbooks and systems around business-critical functions
- Automate repetitive tasks for efficiency and consistency
11. No Visibility into Key Performance Indicators
Similar to processes, private equity wants to see rigorous measurement and tracking of Key Performance Indicators (KPIs) tied to core business health.
Relevant KPIs might trace lead volume, cost per acquisition, conversion rates, fulfillment costs, customer lifetime value, churn, NPS score and other drivers of incremental and enterprise value. Lack of KPI monitoring and analysis—or delinquency sharing insights—spooks prospective buyers.
How to fix it:
- Identify 12-15 KPIs capturing essential business performance
- Monitor KPIs in real-time with automated dashboards
- Distribute KPI reports to leadership team weekly
12. No Audit-Ready Financials
No matter how compelling the broader business seems, poor financial hygiene is an instant disqualifier across private equity. Financials make up 40-50% of your total valuation. Without accurate and transparent P&L docs that stand up to auditor scrutiny, no quality PE firm will engage.
Many entrepreneurs underestimate the rigor PE applies in evaluating quality of earnings, intentionally and unintentionally distorting how companies present performance narratives. They will root out any issues or loose ends.
How to fix it:
- Implement GAAP accounting with an audit focus
- Hire an experienced CFO or high-quality accounting firm
- Prepare to answer detailed questions on methodology, adjustments, etc.
13. No Established Board or Advisory Structure
Virtually every private equity controlled company implements some version of a board of directors or key advisory functions straightaway. PE firms rely on seasoned leaders that offer governance, strategic guidance, controls establishment, and subject matter expertise.
A board gets far more likely to stumble when forming at the same exact time PE takes over. Prior familiarity and integration with outside leadership guidance demonstrates preparedness.
How to fix it:
- Recruit 3-5 proven business veterans to a advisory or informal board role
- Define mandate around growth, financial oversight, controls advice
- Schedule quarterly board meetings to pressure test strategy
14. Less Than $5 Million in EBITDA
Fair or not, a $5 million EBITDA threshold has formed across private equity in recent decades. PE associates claim minimum efficient deal sizes start at that level of profitability. Less than $5 million EBITDA often attracts tire-kicking rather than serious engagement.
At under $5 million in EBITDA, PE interest depends much more on a compelling growth narrative and broader diligence. Above that threshold signals readiness scale through tack-on acquisitions.
How to fix it:
- Build a 3-5 year financial plan to clear $5 million-plus EBITDA
- Collect case studies demonstrating efficient integrations and sales/cost synergies
- Be prepared to evaluate creative structures to bridge valuation gaps
15. Not Built to Scale via M&A
The lifeblood of private equity involves consolidating platforms and executing buy-and-build strategies. After acquiring your business, their plan relies on efficiently integrating add-on acquisitions to rapidly gain scale.
To execute this playbook, your infrastructure needs to support smooth post-merger integrations around financial reporting, operations, sales and cultural alignment.
How to fix it:
- Detail past projects or accomplishments absorbing smaller acquisitions
- Highlight specific executive experience governing M&A integrations
- Overinvest in scalable platforms and modularized processes
Are You Ready to Meet with Private Equity?
Selling your business to a private equity firm for top dollar requires meeting high standards across business fundamentals. Use this checklist to address any deficiencies that might undermine your company’s value.
The good news? Executing on the fixes and areas of optimization outlined above also serves to expand your enterprise value generally. Win-win.
You now have a roadmap to ready your business for a lucrative private equity exit or other strategic alternatives down the line. Plot the journey deliberately and patiently to control your own destiny.