A private equity firm called. They're interested in your company. They mentioned a valuation that made you sit up straighter. This is validation, right? Proof you built something valuable.
It is. But before you start imagining your exit, you need to understand why they're calling and what the next five years actually look like if you say yes.
Why they're really calling
PE firms don't invest in potential. They invest in predictable cash flow they can amplify through leverage and operational changes.
If they're calling you, it's because your business shows:
- Consistent EBITDA margins they can model forward
- A fragmented market where they can bolt on acquisitions
- Operational slack they believe they can tighten
- Revenue that doesn't depend entirely on you
That last point matters. If you are the business—if every major customer relationship runs through you—you're not selling a company. You're selling a job with a complicated employment contract.
PE firms typically pay 5-8x EBITDA for businesses in the lower middle market. A company generating $2M in EBITDA might fetch $10-16M. Sounds great until you realize $4-6M of that might be tied to an earnout you have to stick around to collect.
What the deal structure actually looks like
Here's what most founders don't fully grasp until they're in the LOI: you're probably not walking away with a check and a handshake.
A typical deal structure might look like:
- 60-70% cash at close
- 10-20% rolled equity (you're reinvesting in the new entity)
- 10-20% earnout tied to hitting targets over 2-3 years
That rolled equity isn't charity. PE firms want you financially motivated to help them hit their return targets. They're planning to sell in 4-6 years, and they need you rowing in the same direction.
The earnout is where deals get complicated. If it's tied to revenue, you have some control. If it's tied to EBITDA after they've loaded the company with debt and management fees, you might be chasing a number that keeps moving away from you.
What changes after close
The Monday after closing feels different. You still run the business, but now you have a board. You have reporting requirements. You have a leverage ratio to maintain.
Expect these changes:
Financial reporting goes from quarterly to monthly, sometimes weekly for key metrics. If your books aren't clean, they will be—but you'll be the one cleaning them.
Capital expenditures need approval. That equipment purchase you would have made on Tuesday? Now it's a board presentation.
Hiring and compensation get scrutinized. Your management team might get upgraded, which is a polite way of saying replaced.
Debt service comes first. PE firms typically lever acquisitions at 3-5x EBITDA. A $2M EBITDA business might carry $6-10M in debt. That debt gets paid before distributions, bonuses, or reinvestment.
This isn't necessarily bad. Many founders find the discipline useful. But if you're used to running your company by gut feel and keeping cash in the business for a rainy day, the adjustment is real.
When it makes sense anyway
PE isn't a trap. For the right founder at the right time, it's a legitimate path to liquidity and growth.
It makes sense if:
- You want partial liquidity now but aren't ready to fully retire
- You've hit a ceiling and need capital and expertise to break through
- You're realistic about working for someone else for 3-5 years
- Your business genuinely has acquisition or operational upside you can't capture alone
It doesn't make sense if you're burned out and hoping a PE firm will buy you out of your problems. They won't. They'll buy your problems and expect you to fix them.
Where to start
Before you take another call from a PE firm, get clear on three numbers: your actual trailing twelve-month EBITDA (adjusted, defensible), your minimum acceptable net proceeds, and how many years you're genuinely willing to stay.
If you're not sure what your company looks like through a buyer's eyes, that's worth figuring out now—not during due diligence. At Laverton Advisory, we help founders understand their numbers before the negotiation starts, so they're making decisions from clarity, not flattery.
Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.