Financial Buyers

Private equity is technically “equity that is private.” This is different from public equity, which is equity that is publicly held or traded. Private equity groups are the most common buyers of mid-sized companies in many industries. 

Financial buyers primarily consist of private equity firms and value a business based solely on its numbers without taking into account the impact of any synergies.

There are approximately 2,000 to 3,000 private equity firms in the United States. In addition, there are also family investment offices and other types of investors that function similarly to private equity firms.

Private equity groups raise money from institutional investors, or limited partners, and then invest these funds into private companies on behalf of the investors. The fund usually has a lifespan of 10 years, and the PE firm normally has a holding period of three to seven years for each business in which they invest. The PE firm makes a profit either from distributions it pays itself out of the company’s earnings or from selling the company at a higher price than it paid, or both.



Financial buyers are the most common buyers of middle-market companies. They focus on the return on investment, technically called the internal rate of return, or IRR, as opposed to any strategic benefits of the acquisition. 

PE firms are experts at scaling companies through creating strategic relationships, building strong management teams, and developing efficient sales and marketing programs. The end goal for many PE firms is to sell the business to a strategic buyer.

PE firms purchase a company as a stand-alone entity, and the changes they make to the business post-closing are designed to increase the value of the business. Any adjustments they make are to increase profitability and make the company more attractive to future investors. 

As a result, financial buyers analyze a company’s cash flow on a stand-alone basis, without taking into account any synergistic benefits, with the objective of enhancing the capacity to increase earnings and the value of the business over the next three to seven years. 

Price is an important consideration for these buyers because the business is typically run as a stand-alone company post-closing unless they own a similar company in their portfolio. 

PE firms don’t usually plan to integrate a newly purchased company with another company post-closing like strategic buyers do. As a result, PE firms are restricted as to the multiples they can pay, and these multiples are fairly easy to predict. The only exception to these rules is when a PE firm owns a company in their portfolio that may have some synergistic benefit for your company.


The only exception to the rules above is when a financial buyer owns a company in their portfolio that is a direct competitor of the target company. In these situations, the buyer can be thought of more as a strategic or industry buyer than a financial buyer.

Developing an exit plan is paramount if you wish to sell to a PE firm. If there is no defined exit, including a list of potential companies you can likely sell your business to in the future, it’s unlikely the PE firm will be interested in your business. The PE firm must be able to significantly increase the value of your business before they consider acquiring it. 

Most PE firms target an internal rate of return (IRR) of 20% to 30% per year, which means they must generate a return on invested capital of two to four times if they exit the investment, or re-sell your business in three to five years.


Internal Rate of Return

PE firms use significant leverage when purchasing a company because the leverage increases their internal rate of return. 

IRR is also heavily dependent on the holding period, or the amount of time the investment is held, which is why a PE firm’s holding period is shorter than the holding period for other buyers. If leverage, or bank debt, is used to acquire your business, your business must generate enough cash flow to cover the debt service. As a result, a PE firm can’t pay more for your business than the numbers dictate.

Retaining the Management Team

Private equity firms almost always prefer to retain both you and your existing management team. After all, private equity firms are often not industry experts and will need someone to run the company post-closing. If you and your management team don’t stay to operate the business post-closing, the PE firm must bring in a team to operate it. This increases risk, and therefore lowers the value of your business.

Deciding To Sell to a Financial Buyer 

Selling to a PE firm allows you to sell a portion of your company now, thereby diversifying your risk. You can then sell the remaining portion in the future, potentially achieving a second, larger exit in three to seven years when the PE firm re-sells the business. The PE firm incentivizes you to stay involved by encouraging you to retain at least a 20% interest in the business post-closing. 

For example, you sell 80% of your shares now, which is usually enough to secure retirement, and you retain 20% of the company post-closing. The remaining 20% equity may lead to a larger exit for you than the initial 80% sale. 

Tips for Dealing With Financial Buyers

When dealing with financial buyers, I recommend the following:

  • Build a Strong Management Team: Financial buyers typically require the existing management team to remain to operate the business after the closing.
  • Increase EBITDA: This is the primary metric financial buyers use to value a business.
When selling your business, keep in mind who the most likely buyer will be.