Should You Sell Your Business to Private Equity?
Should You Sell Your Business to Private Equity? Here’s What to Know
If your inbox has started filling with emails from private equity firms wanting to “start a conversation,” you’re not alone.
Private equity buyers have been flooding the Canadian and U.S. lower middle market—especially in industries like home services, marketing agencies, technology, and manufacturing. They’re looking for profitable, founder-led companies with $500K–$5M in EBITDA.
Selling to private equity can be an incredible opportunity—but it’s not always the right fit.
This guide explains how PE deals work, when it makes sense to sell, and how to protect yourself when the offers start coming in.
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What Private Equity Buyers Look For
PE firms don’t buy ideas—they buy performance.
They’re looking for companies with stable cash flow and room to scale.
Here’s what typically attracts them:
Consistent EBITDA: $500K–$5M is the sweet spot.
Strong management team: The business can run without the founder.
Recurring or repeat revenue: Predictable contracts = predictable returns.
Proven growth: Clear expansion opportunities.
Fragmented industries: Opportunities for roll-up acquisitions.
If your business fits this profile, it’s likely already on a PE firm’s radar.
How Private Equity Deals Are Structured
Unlike individual buyers or strategic acquirers, PE firms often prefer partial acquisitions. Their goal is to partner with the founder, scale the business, and sell it again in 3–7 years for a higher multiple.
Typical structures include:
Cash at close (60–80%) — immediate liquidity for the owner.
Rollover equity (10–40%) — you retain partial ownership for future upside.
Earnouts (0–20%) — contingent on hitting performance targets.
Board involvement — PE firms often take a board seat and help with strategy.
This “second bite of the apple” can be highly profitable if the business grows post-acquisition—but it also means giving up some control.
Okay, that was a lot of jargon, here are some definitions if you’re not familiar with the above.
Quick definitions for first‑time sellers
Cash at close: The money you receive on the day the deal closes. Higher cash at close means lower risk.
Rollover equity: The ownership you keep by reinvesting part of the sale price into the new company controlled by the PE firm. If the company grows and sells again, your rollover can be worth much more.
Earnout: A portion of the price you only receive later if the business hits agreed targets after closing. Targets and measurement periods must be specific and realistic.
Seller note (vendor take‑back): A loan from you to the buyer that is repaid over time with interest. Sits behind bank debt in priority.
Working capital adjustment: A true‑up after close to ensure the business has a normal level of cash‑like items, receivables, and inventory.
Governance/board rights: How decisions are made post‑close. Defines voting control, budgets, hiring, and distributions.
Drag/Tag rights: Clauses that control how minority owners participate in a future sale.
Tip: Compare offers based on whether they meet your needs, not just the top-line number. PE firms can manipulate deal structures to make ‘bad deals’ look great on paper, exert caution (ideally, hire an M&A firm to help you negotiate).
Key Terms to Know When Selling to Private Equity
Don't let PE buyers confuse you with finance jargon. Here's what you need to know:
The Pros and Cons of Selling to Private Equity
Selling to PE isn’t inherently good or bad—it depends on your goals.
Here’s a balanced view:
When Selling to Private Equity Makes Sense
Private equity can be an excellent fit if:
You want liquidity but aren’t ready to fully retire.
You’re open to staying on for 1–3 years to help grow the business.
You have clear ideas for scaling but need capital to execute.
You’re comfortable with investors influencing strategic direction.
For many founders, this is the perfect bridge between ownership and a full exit—cash now, upside later.
When to Walk Away from Private Equity
Sometimes, the shiny valuation hides red flags. Consider walking away if:
The earnout or rollover equity is too large relative to cash at close.
The buyer is vague about post-close decision-making or control.
You feel pressured to sign before full due diligence.
The PE firm has limited experience in your industry.
A poor partnership can undo decades of work.
Always verify the buyer’s track record—especially how they’ve treated other founders post-acquisition.
M&A Case Study: A $1M EBITDA Digital Agency Exit
Consider a digital agency owner with $1M in EBITDA who receives an offer from a private equity firm.
Let’s say the PE firm offers $5.2M total: $3.8M cash at close and $1.4M tied to an earn-out.
If a Breakwater was involved, we’d likely restructure the deal:
80% cash at close
20% retained equity in the roll-up platform
Three years later, when the PE firm sold that platform, the client's retained equity delivered an additional $2.1M.
The result: 60% more than the original offer.
That's the power of proper structuring—and the value of having representation on your side.
How to Negotiate From Strength
When a private equity firm approaches you, remember:
If one buyer is interested, others probably are too.
Here’s how to create leverage:
Get a professional valuation. Know your number before you negotiate.
Run a structured sale process. Multiple buyers drive competitive tension.
Avoid exclusivity too early. Keep optionality until terms are firm.
Use advisors who’ve sold to PE before. These deals are complex and require specialized expertise.
Breakwater’s team helps founders benchmark every PE offer against real market data—ensuring you know when to push, when to partner, and when to walk.
Frequently Asked Questions About Selling to Private Equity
How common is it for private equity to buy small and mid-sized businesses?
Very common. PE firms are actively acquiring companies with $2M–$20M in revenue and $500K+ in EBITDA across Canada and the U.S.
Do I have to stay involved after selling?
Usually, yes—most PE firms want you to remain for a transition period or as a minority partner to help grow the business.
What’s the average multiple PE firms pay?
Most often 3-6x EBITDA. But PE is also know for paying more than 6x for the right deal, but it depends on size, margins, and growth potential.
Will I lose control of my company?
Partially. Once you sell a majority stake, investors gain voting rights and board influence, but good deals maintain shared governance.
How do I know if a PE buyer is legitimate?
Ask for references from other founders they’ve acquired, verify their fund size, and ensure they have experience in your industry.
Recommended Reading
For more resources on evaluating offers and exit strategies, explore these related Breakwater articles:
How to Find the Right M&A Advisor
Find out how to choose an advisor who can run a competitive process, negotiate structure (not just price), and protect your leverage through diligence.
Selling a Services Business? Read This Before You Sign Anything
A practical guide for services founders on valuation, owner‑dependency, documentation, and the red flags that kill deals.
Agency‑specific playbook covering valuation ranges, recurring revenue premiums, client concentration, and transition planning.
How to Sell a Business with $500K+ EBITDA
Step‑by‑step roadmap for founders at the $500K EBITDA threshold to prepare, create buyer demand, and maximize exit value.
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