Selling Your Business To Private Equity: Things to Consider

Selling your business to a private equity group is an extremely important and delicate decision for founders and shareholders. Unlike selling to an individual buyer, private equity funds have objectives regarding the value acceleration of operational restructuring, as well as a return on investment in a defined timeframe.

In this article we will examine the considerations to consider before making your choice: understanding the profile of a potential buyer; completing due diligence beforehand; understanding the legal implications; planning for post-transaction prospects. 

This guide is universally relevant and not uniquely applicable to a particular jurisdiction or territory. This article aims to give you a clear, realistic, and practical understanding of what selling your business to private equity means.

Understanding the Private Equity Buyer Profile

PE firm funds are investment vehicles that raise capital from institutional investors to acquire stakes in private companies (private equity capital raising). Their main objective is to generate value over a defined period, generally between three and seven years, and then resell the stake at a significant return.

The acquired companies become part of a portfolio of companies, each selected for its growth potential and alignment with the fund’s strategy. The focus is on private equity value creation, i.e., improving operating performance, expanding into existing markets, or optimizing corporate structure.

Is Private Equity Right for Your Business?

Not all companies are suited to PE firm deals. Generally, PE firms look for companies with stable cash flows, growing margins, and a scalable model. Companies with positive EBITDA, a clear market position, and the potential for expansion, including internationally, are particularly attractive.

The reasons that prompt an entrepreneur to consider exiting can vary from succession planning to the need for capital to grow to the desire to monetize part of the value built up. However, before sell your business to private equity fund, it is essential to assess the operational and cultural compatibility between the parties. 

Preparing Your Business for Sale

Selling a firm to a PE firm requires adequate preparation to succeed. The first step is to conduct a financial audit to verify that the accounts are in order and that all relevant information is transparent and accurate.

Next, you need to prepare a data room containing all essential firm documents such as contracts, agreements with suppliers, licenses and trademarks, growth models, and financial plans.

Finally, formalizing internal firm structures is a major advantage thanks to well-defined procedures and professional management.

Valuation and Deal Structure Expectations

Private equity companies frequently value businesses based on EBITDA multiples and potential performance. However, there is no uniform value formula; every transaction is affected by variations in sector factors, margins, scalability, and competitive advantages.

Deal structures can vary widely, ranging from a total sale to a majority or minority stake and a combination of a rollover buyout and a gradual buyout. In many transactions, the seller will reinvest a portion of purchase proceeds through rollover equity to continue investing in the company’s future growth. 

Another widely employed tool is the earn-out, in which a portion of the final purchase price is contingent upon the business’s post-acquisition performance.

Legal and Regulatory Considerations

Selling a company to a PE firm consists of a due diligence phase where all legal, tax, contractual, regulatory obligations, and compliance requirements will be reviewed. During diligence, there may be significant issues that will drive the deal structure or the economic elements of any deal.

The essential documents will include the Share Purchase Agreement (SPA), representations and warranties, and any ancillary agreements. It is advisable to retain an experienced private equity attorney who can protect seller interests and avoid future liability.

Negotiating the Sale and Terms

Once you have begun negotiations with the fund, you will need to carefully negotiate all other elements of the deal, particularly the key clauses regarding control rights, board composition, and veto rights.

Price is generally only one component of the deal. Other relevant considerations could be payment terms (earn-outs based on future revenue), whether the founder will remain with the company, and rights governing future exits.

Finally, it is standard practice to include exclusivity and confidentiality clauses during negotiations. 

Post-Sale Involvement and Transition

The founders’ or owners’ involvement after the deal closes will depend on the terms agreed upon at closing. The entrepreneur may stay on actively as CEO or remain in an advisory capacity. In some cases there will be a defined transition period to facilitate a hand-over. 

During this time, non-competition clauses and some type of ongoing control related to earn-outs will be common. Private equity funds tend to maintain some active oversight but will leave operational management to the extent that it has performed well.

Benefits and Risks of Selling to Private Equity

Selling to a PE firm has concrete advantages but also significant risks. Among the main benefits are:

• Access to capital for growth;
• Possibility of liquidating part of the shares while maintaining a stake;
• Contribution of managerial or operational expertise to the fund.

On the other hand, there are potential pitfalls.

• Loss of operational control, which can be difficult to manage, especially if differences in vision emerge with the new partner;
• Cultural alignment issues or pressure to achieve short-term financial outcomes, in contrast to long-term objectives;

An honest assessment of opportunities and limitations is essential to making an informed and well-considered decision on how to sell your business to private equity​.

How to Select the Right Private Equity Partner

Selecting the right partner will be one of the most important decisions you make during the sale process. Not all private equity funds are the same: some focus on specific industries, while others may employ more active or passive management styles. For this reason, one of the most important things you can do is assess their experience, track record (in similar companies), and investment philosophy. 

Speaking with other entrepreneurs who have used the fund will provide you with further insights.

Alternatives to Selling to Private Equity

Selling to a PE firm is just one exit or liquidity event. There are other options, such as selling to a strategic buyer—most often a competitor or other business in the same industry that sees potential operating synergies. Another is the IPO (initial public offering), which is when you raise capital in the capital markets but remain in control.

Some entrepreneurs choose family transfers, especially when running a family business, and employee stock ownership plan (ESOP) when looking to provide continuity internally.

FAQs

What does selling your business to private equity mean?

This involves transferring part or all of a private company’s ownership to a fund to stimulate its growth or raise money.

How do I know if my business is ready for private equity?

Consider whether your company has a solid financial foundation, good growth potential, and adequate facilities.

What are the risks of selling to a private equity firm?

The main risks include loss of operational control, cultural misalignment, and pressure on performance.

Can I still be involved in the company after selling?

Yes. Many agreements stipulate the retention of management or advisory roles, particularly in the case of minority share sales.

How is valuation determined in private equity deals?

The valuation is based on EBITDA multiples, potential growth opportunities, and similar transactions in the industry.

What role does a private equity attorney play?

We help you draft and structure the agreement by negotiating terms, reviewing contracts, and protecting your legal interests throughout the entire sales process.

References

Traverse Legal. (2025, May 23). Selling to Private Equity: The Legal and Financial Pitfalls You Can’t Ignore.Retrieved from https://www.traverselegal.com/blog/selling-your-business-to-private-equity/traverselegal.com

Bloomberg Law. (n.d.). Pros & Cons of Earn-Outs & Rollovers in Private Equity M&A Transactions. Retrieved from https://www.bloomberglaw.com/external/document/XAKK2U6C000000/m-a-professional-perspective-pros-cons-of-earn-outs-rollovers-inBloomberg Law+1Bloomberg Law+1

Moore Barlow LLP. (2024). A Comprehensive Guide to Private Equity Law. Retrieved from https://www.moorebarlow.com/guides/a-comprehensive-guide-to-private-equity-law/