6 Things Private Equity Firms Look for in Companies

When private equity (PE) firms look for companies to invest in or buy, they have a set of criteria in mind. For starters, these companies need to show strong growth potential regarding both sales and profits. A PE firm will usually buy a majority position in that company and will leverage their resources and networks to help that company achieve its potential. After a period of somewhere between three to seven years, on average, they will resell it or take it public for a profit.

So what do PE companies look for in a business? Since each PE firm has its own investment strategy and style, each has a different approach and prioritizes different things. Some may be inclined to go for undervalued or overlooked companies, while others may prefer ones that may appear inefficient. Nevertheless, there are six characteristics that all PE prospects have in common.

Little Capital Expenditures

This characteristic is somewhat apparent. If a company requires ongoing reinvestment before it becomes profitable and successful, PE firms may be less inclined to purchase it. Even if the company has a potential for growth, the investment may be too high for the transaction to be profitable.

A Non-Cyclical Industry

Another criterion that most PE firms use when they buy a company is the state of the market where the company resides. If the market is too volatile, it will be difficult for them to exit their position.

The Management Team

In most cases, PE firms do not have teams to take over the management positions. In this case, they need to make sure that the current management team is a good one so that they won’t necessarily be directly involved in the day-to-day runnings of the company.


Leveraging Technology

As we know, the business landscape is changing at an accelerating rate. This change is driven, in large part, by disruptive technologies such as robotics, automation, data visualization, and advanced analytics. Companies that are using or experimenting with these new technologies are proven to be more versatile and adaptive to change and are, thus, attractive to PE organizations.


A Good Business Plan

If a company’s business plan can predict sales and profit growth and has the necessary data to back it up, then the company has a good chance of being picked up by a PE firm. In other words, the product you are developing should fit into a growing market and should be backed by a viable economic model.

Reliable Cash Flows

Typically, PE firms LBO companies, which means that the businesses they target have steady and stable cash flows that can meet their required interest payments. In the event of missing a payment, the PE firm could lose the ownership of the company in favor of the bank.


These are some of the most important criteria that will make your company a prime target for private equity firms. The more of these you will be able to check out, the higher the chances you will have. Start with the ones that prove the easiest for you at the moment and work your way around the list. For more information, please feel free to visit our website, or follow us on Twitter.


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