What Private Equity Really Wants to See Before Writing a Check

Private equity firms look at dozens — sometimes hundreds — of potential acquisitions for every deal they close. Knowing what they're evaluating and how they prioritize gives you a significant advantage, whether you're preparing to sell or just want to build a more valuable business.

Here's what PE is actually looking at when they evaluate your company.

The Financial Metrics That Matter Most

Adjusted EBITDA — and the Quality Behind It

EBITDA is the starting point, but PE firms care as much about the quality of your EBITDA as the quantity. They'll hire a third-party firm to run a Quality of Earnings (QoE) analysis that dissects every add-back, every revenue line, and every expense category.

What survives a QoE:

• Owner's above-market compensation (well-documented)
• Clearly one-time expenses with supporting evidence
• Non-cash charges like depreciation

What doesn't survive:

• "One-time" expenses that recur every year
• Add-backs without documentation
• Revenue that was pulled forward or artificially inflated
• Cost cuts that aren't sustainable (e.g., slashing marketing spend)

The gap between seller-adjusted EBITDA and QoE-adjusted EBITDA can be significant. If your add-backs don't hold up, the PE firm either walks away or recuts the deal at a lower number. I've seen QoE adjustments reduce EBITDA by 15-30% on deals where the seller was aggressive with add-backs.

Revenue Quality

PE firms break down your revenue into categories and evaluate each one differently:

Recurring revenue (subscriptions, service contracts, maintenance agreements) — this is the gold standard. It's predictable, usually higher-margin, and reduces customer acquisition costs. A business with 50%+ recurring revenue gets a meaningfully higher multiple than one with 100% project-based revenue.

Repeat revenue (customers who come back regularly but without contracts) — still valuable, especially if you can demonstrate consistent patterns. A restaurant supply company where 80% of customers order monthly is nearly as predictable as a subscription model.

One-time revenue (project work, installations, new customer sales) — not bad, but PE will discount its predictability. They'll want to see strong pipeline data, win rates, and historical consistency.

Concentration risk — if one customer is 15%+ of revenue, that's a red flag. If one customer is 25%+, most PE firms will either pass or heavily discount the value. They'll also look at industry concentration — are all your customers in one vertical that could face a downturn?

Margin Profile

PE firms are obsessed with margins because margins drive returns:

Gross margin tells them how much room there is for growth and efficiency. They want to see 40%+ for service businesses, 25%+ for distribution, 50%+ for software. They also want to see margin stability — bouncing between 35% and 50% quarter to quarter raises questions about pricing discipline and cost control.

EBITDA margin tells them how efficiently the business converts revenue to earnings. Higher is better, but the trend matters more. Improving EBITDA margins signal operational leverage. Declining margins signal problems.

Margin by service line or product. PE firms will want to know which parts of your business make money and which don't. If 30% of your revenue generates 70% of your profit, they'll want to understand why — and whether they can cut the unprofitable segments or fix them.

Cash Flow Conversion

Generating EBITDA is one thing. Converting it to cash is another. PE firms closely examine:

Working capital dynamics. How much cash gets tied up in receivables and inventory as you grow? If every $1M in revenue growth requires $200K in additional working capital, that affects the return model.

Capital expenditure requirements. What does the business need to spend annually to maintain its current operations? PE distinguishes between maintenance capex (replacing what breaks) and growth capex (expanding capacity). High maintenance capex reduces the effective cash flow below EBITDA.

Cash conversion cycle. How long between spending money (inventory, labor) and collecting it? A 30-day cycle is healthy. A 90-day cycle means the business is constantly hungry for working capital.

The Operational KPIs PE Firms Track

Beyond the financials, PE firms evaluate operational health through specific KPIs. Which ones matter depends on your industry, but common ones include:

Customer metrics:

• Customer retention/churn rate
• Customer acquisition cost (CAC)
• Lifetime value (LTV)
• Net Promoter Score or equivalent satisfaction measure
• Revenue per customer trending up or down

Employee metrics:

• Employee turnover rate (especially in key roles)
• Revenue per employee
• Tenure of the management team
• Open positions and time-to-fill
• Wage pressure and benefit costs trending over time

Operational efficiency:

• Utilization rates (for service businesses)
• Capacity utilization (for manufacturing/production)
• On-time delivery or service level metrics
• Backlog or pipeline coverage
• Unit economics by service line

PE firms use these KPIs to build their financial model and value creation plan. If you can't provide these numbers, it signals either that you don't track them (operational immaturity) or that the numbers aren't good (risk). Neither is a good look.

What Makes PE Say Yes

After evaluating hundreds of deals, the ones that get offers share these characteristics:

Defensible EBITDA above their threshold. For most PE firms, that's $1.5M+. For some lower-middle-market funds, $750K-$1M can work as an add-on. The EBITDA needs to be clean and defensible under QoE scrutiny.

Clear growth levers. PE needs to see how they'll grow the business to generate returns. Common levers they look for: pricing power, geographic expansion, new service lines, cross-selling opportunities, and add-on acquisition targets in your market.

A team that can execute without the founder. This is the single biggest deal-killer I see. If the owner is the head of sales, the lead technician, and the relationship manager for every key account, PE sees a business that may not survive the transition. They want a GM, department heads, or at least strong number-twos who can run day-to-day operations.

Industry tailwinds. PE loves businesses in sectors with favorable demographics, regulatory trends, or structural shifts. Aging infrastructure driving demand for home services. Healthcare consolidation. Digital transformation creating IT managed services demand. If your industry has a compelling macro story, that matters.

Scalable infrastructure. Can the business handle 2-3x its current volume with incremental investment? PE doesn't want to rebuild your tech stack, hire an entirely new management team, and redesign your processes. They want a foundation they can build on.

What Makes PE Walk Away

Declining revenue or margins without a clear, fixable cause. If the business has been shrinking for two years and there's no obvious turnaround plan, PE won't bet on a reversal.

Messy or unreliable financials. If your books take weeks to produce, numbers don't reconcile, or the QoE reveals material adjustments, you lose credibility fast. PE firms see this as both a valuation risk and an operational red flag.

Excessive owner dependence. If you leave and 30% of revenue walks out with you, the business isn't worth what the EBITDA says it is. PE will either pass or price in the transition risk heavily.

Regulatory or legal exposure. Pending litigation, environmental issues, licensing risks, or compliance problems can kill a deal instantly. PE firms are conservative about downside risk.

Unrealistic expectations. If you're expecting 8x EBITDA for a $1.5M EBITDA business with flat growth and high owner dependence, PE will pass. They see enough deal flow that they don't need to overpay.

How to Position Your Business for PE

If a PE exit is your goal in the next 2-3 years, start working on these areas now:

Get a QoE done on yourself. Hire a firm to run a sell-side QoE before going to market. You'll discover exactly what adjustments hold up and which ones don't — and you can fix the issues before a buyer finds them.

Build your KPI dashboard. Start tracking the metrics PE cares about. Even 12 months of clean KPI data dramatically improves buyer confidence.

Reduce concentration risk. If your top customer is 20% of revenue, diversify. Add new customers, expand wallet share with mid-tier accounts, and build recurring revenue streams.

Invest in management. Hire a strong number-two. Give your managers real authority and let them build relationships with key customers. The goal is that buyers meet your team and feel confident the business runs without you.

Document your growth plan. PE wants to see a credible 3-5 year plan with specific initiatives, estimated costs, and projected returns. Not a fantasy — a realistic plan backed by market data and your track record.

The Bottom Line

PE firms are analytical, process-driven buyers. They're not buying on gut feel — they're running detailed models on your financials, operations, and market position. The businesses that attract the best offers are the ones that can withstand that scrutiny and present a clear, data-backed case for growth.

The good news: every improvement you make to attract PE interest also makes your business more profitable, more resilient, and more valuable — regardless of who eventually buys it.

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Want to know if your business is PE-ready? Book a free call and we'll walk through your financials and positioning together.