Selling To A Private Equity Firm: What To Expect

Private equity (PE) firms have become increasingly active in the Australian business landscape. For business owners considering an exit, selling to a private equity firm can offer significant upside, but it also comes with unique expectations, due diligence requirements, and negotiation dynamics.

This guide outlines what Australian business owners should expect when selling to a private equity firm, and how to prepare for a successful transaction.

What Is a Private Equity Firm?

Private equity firms are investment managers that raise capital from institutional investors (like super funds, insurance companies, or high-net-worth individuals) to acquire and grow private businesses.

They typically invest in mature, profitable companies with strong growth potential. In Australia, active PE firms include names like Pacific Equity Partners, Quadrant, Next Capital, and Allegro Funds.

Key features of a PE acquisition:

• PE firms often acquire a controlling interest (majority ownership)
• They aim to grow the business and sell it within 3 - 7 years
• They may retain the founder in a management or minority equity role
• Acquisition funding typically involves a mix of equity and debt. They may also offer Vendor Finance.
• They look for industries with attractive pathways to growth
  
  

What They Look For in a Business

Private equity buyers have a defined investment thesis. They are not simply buying a job or lifestyle. They are acquiring a strategic asset with a clear value uplift potential.

Common attributes of target businesses include:

• EBITDA of $2M–$20M
• Stable or growing revenues and margins
• Scalable business model with growth potential
• Strong management team (ideally willing to stay on post-deal)
• Recurring or contracted revenue
• Clean financials and low regulatory risk

If your business ticks these boxes, it could be a candidate for a PE sale. However, expect a rigorous vetting process.

What to Expect During the Sale Process

Selling to a private equity firm is not like selling to an individual buyer or competitor. The process is formal, analytical, and often lengthy. Here's what typically happens:

1. Initial approach or introduction: Usually via an investment banker or broker
2. Confidential Information Memorandum (CIM): You'll need to prepare a detailed overview of your business
3. Indicative offer: A non-binding letter of intent or term sheet is issued
4. Financial Models & Due diligence: Legal, financial, tax, HR, IT, and commercial due diligence, can take 6–10 weeks
5. Negotiation of terms: Purchase agreement, warranties, earn-outs, and shareholder agreements (if retaining equity)
6. Completion: Funds are transferred and control is passed to the new owner

PE firms often hire specialist advisors to perform diligence, so sellers should expect high scrutiny of their financials, systems, customer contracts, and compliance history.

Valuation and Deal Structure

Private equity firms value businesses based on a multiple of EBITDA (earnings before interest, tax, depreciation, and amortisation). Typical multiples in Australia range from:

• 4x to 6x EBITDA for smaller firms ($2M–$5M EBITDA)
• 6x to 9x EBITDA for mid-market firms ($5M–$15M EBITDA)
• Up to 12x or higher for high-growth or strategic assets

Deal structures may include:

• Cash at completion
• Earn-out: Deferred payments based on future performance
• Vendor rollover equity: Seller retains 10–30% equity in the new entity

The rollover structure aligns seller and buyer interests post-deal, especially if the PE firm plans a secondary exit or IPO in future.

Life After the Sale

Unlike many trade buyers, private equity firms often want the existing management team to remain for a period to ensure continuity and drive future growth.

You may be offered:

• An ongoing role (e.g. CEO, advisor, board member)
• Equity incentives or earn-out milestones
• Opportunities to lead bolt-on acquisitions or strategic initiatives

However, your autonomy may change. PE firms are actively involved in governance, budgeting, and strategic decision-making. Be prepared for more structure, reporting, and oversight than in a founder-led business.

Tips for a Smooth Private Equity Exit

• Get your house in order: financials, contracts, compliance, and reporting
• Engage experienced advisors (corporate lawyer, accountant, M&A broker)
• Understand your walk-away number and your appetite for staying involved
• Clarify your long-term goals, do you want a clean exit or a second bite of the cherry?
• Ensure alignment with the PE firm on values, strategy, and exit plans

Selling to a private equity firm can be highly rewarding, offering liquidity, continued involvement, and the chance to scale your business with professional backing. But it's not a quick or casual sale. The process is structured, the scrutiny is high, and the deal terms can be complex.

With the right preparation and advice, founders can successfully navigate the PE landscape and unlock exceptional value for their hard work.