Most owners think about a sale in terms of what they hope to receive. Private equity buyers think about what they can grow and eventually sell on to someone else. That gap in perspective is why two UK companies with similar turnover can attract very different offers.
This article looks at the criteria buyers apply to small and mid-sized businesses, and how owners can use them to decide when to go to market.
How Private Equity Buyers Think About a Deal
A private equity fund buys a company with an exit already in mind. Funds hold an investment for a limited period, often somewhere between three and seven years, and the return depends on what the business is worth when they sell. Every acquisition is judged against a plan: improve the company, then hand it to the next owner at a higher value.
For a seller, that means buyers pay less attention to the story of how the company got here and more to whether the results will continue under new ownership. Each area below is a way of testing that.
Growth Buyers Can Verify
A Track Record Behind the Forecast
Buyers put more weight on three to five years of steady results than on an ambitious forecast. Revenue growth that comes from repeatable sources, such as new customers won through a consistent sales process, counts for more than a single large contract or one strong year. If growth has been uneven, be ready to explain why and show what has changed since.
Room to Grow With New Capital
Private equity investors look for levers they can pull: new regions, extra product lines, price increases the market will accept, or smaller competitors worth acquiring. A company held back by a lack of capital or management time can be more attractive than one that has already grown as far as its market allows.
Margins and Quality of Earnings
Buyers price most small and mid-sized companies on a multiple of earnings, usually EBITDA. The number itself matters, but the reliability of the number matters more. During due diligence, a buyer’s accountants carry out a quality of earnings review to check whether reported profit reflects how the business actually performs.
Owners can expect questions about:
- Owner costs run through the business, such as above-market salaries, personal vehicles, or family members on the payroll
- One-off items, including legal disputes, redundancy costs, or unusual repairs
- Gross margin by product, service, or customer group, and whether it is stable or slipping
- Working capital swings that make cash flow look different from profit
Adjusting for these items is normal, but every adjustment needs evidence. A buyer who finds an unsupported add-back will start to doubt the rest of the numbers, and that doubt usually shows up in the price.
Recurring and Predictable Revenue
Predictability lets a buyer plan an investment and raise debt against the business. Contracted or repeat revenue, such as subscriptions and service agreements, is worth more than sales that have to be won again every year.
Customer concentration is closely tied to this. If one client accounts for a large share of revenue, buyers see a single point of failure and may reduce the price or make part of it conditional on that client staying. Retention figures and average contract length help show how secure the revenue base really is.
Management Depth Beyond the Owner
In many small companies, the owner is the main salesperson and the person suppliers call when something goes wrong. A buyer sees that as risk, because much of the value leaves with the owner at completion.
Private equity firms prefer a second layer of managers who run day-to-day operations, hold customer relationships, and can carry on if the founder steps back. Where that team is thin, the buyer may need to hire, which costs money and shows up in the offer. Owners who start delegating a year or two before a sale give buyers evidence that the business runs without them.
Financial Records That Hold Up in Due Diligence
Buyers move quickly once an offer is made, and they expect information to be organised and consistent. Delays and corrections during due diligence damage trust and give the buyer reasons to renegotiate. A prepared seller can usually answer requests within days.
Documents buyers typically ask for include:
- Three years of statutory accounts and current monthly management accounts
- Customer and supplier contracts, including any change-of-control clauses
- Employment contracts and any key-person or incentive arrangements
- Property leases, licences, and intellectual property ownership records
- Tax filings and evidence of compliance
Closing gaps in these records early is far cheaper than fixing them under a buyer’s deadline.
Deciding When to Go to Market
Preparation and timing work together. Sellers tend to do better when they go to market after a period of good trading, with clean financials and a management team in place, rather than in response to a slowdown or a personal deadline. Waiting for perfect conditions carries its own risk, since buyer appetite and lending terms change.
Understanding these criteria is a core part of sell-side M&A advisory, since positioning the business the way buyers want to see it directly affects the final price. Advisers who work with sellers build the buyer list, present the numbers, and run a competitive process, but owners benefit from knowing the same criteria well before any of those conversations start.
A practical approach is to review the business against each area above 18 to 24 months before a planned sale. That gives time to reduce customer concentration, document processes, and build out the second tier of management, all of which take longer than most owners expect.
Seeing Your Business the Way a Buyer Does
Pick the area where your business is weakest and start there. A buyer will find the weak spot eventually, and it is far better to be the owner who already fixed it.
