Selling your business to private equity, start to finish

What a private equity buyer is actually buying

When a private equity firm offers to buy your business, it is not planning to run an HVAC company or an insurance agency for the next thirty years. It is running a strategy called a roll-up. The firm buys many similar businesses in one industry, combines them into a single larger company, spends a few years making that company bigger and more efficient, and then sells the whole group to a larger buyer or takes it public. Everything about the offer, from the price to the terms to what happens to you afterward, follows from that plan. Once you see the strategy, the deal stops feeling personal and starts looking like what it is, a step in someone else's larger project.

This page explains how that project works and where you fit in it. If you want the money math, the valuation page and the calculator handle the numbers. If you have already sold, the after-sale plan is the place to start. Here the goal is to make the deal itself legible.

How a roll-up works: platform and add-on

A roll-up has two kinds of businesses in it, and knowing which one you are tells you almost everything about your price. The first business a firm buys in an industry is the platform. It is the foundation. Everything the firm buys after that gets attached to it. Because the platform needs strong leadership, real systems, and enough size to build on, it earns the highest multiple in the industry. Every business bought after the platform is an add-on. An add-on is folded into the platform, its back office and branding often absorbed, and it is valued on what it adds to the group rather than as a company that could stand alone.

This is why two nearly identical businesses can sell for very different multiples. A $2 million EBITDA HVAC company that becomes a platform might command a high-single-digit multiple, while the same company sold as an add-on to an existing platform might fetch far less, because the add-on buyer is paying only for the increment. The gap between platform and add-on pricing is large in every industry this site covers, and the valuation page lays out the reported ranges. The logic behind the whole strategy is simple arithmetic. The firm buys add-ons at low multiples, bolts them onto a platform that the market values at a high multiple, and the difference becomes profit when the group is sold. This is called buy-and-build, and it is why the firm is so eager to keep buying.

How the process runs

A sale to private equity follows a fairly standard path, and knowing the steps helps you see where your leverage is highest, which is early.

Deciding whether to hire an advisor

The first real decision is whether to run a process or take a call. A single buyer that finds you directly wants to keep things quiet, because quiet means no competition and a lower price. An investment banker or business broker does the opposite: they bring several buyers to the table at once and let them compete. That competition is usually worth far more than the fee, especially for a healthy business that more than one platform would want. The honest exception is a smaller deal where a full-fee banker would consume too much of the gain, or a situation where one strategic buyer is genuinely the only serious option. Even then, having someone experienced who has done many of these deals sit across from a buyer who does them for a living tends to pay for itself.

The letter of intent and exclusivity

Once a buyer is serious, it sends a letter of intent, or LOI. This is a short document that states the price, the rough structure, and the main terms. It is mostly not binding, with one very important exception: it almost always grants the buyer a period of exclusivity, often 60 to 90 days, during which you agree not to talk to anyone else. Exclusivity is the moment your leverage drops sharply. Before you sign the LOI, you have competition and options. After you sign, you have one buyer and a clock. So the LOI is the document to negotiate hard, not the final purchase agreement. Get the price, the rollover percentage, the add-backs, and the working capital approach as clear as you can before exclusivity begins.

The quality of earnings review

During exclusivity, the buyer hires accountants to run a quality of earnings review, usually shortened to QoE. This is an audit-style examination of your profit. The accountants confirm your EBITDA is real, test every add-back you claimed, look for revenue that will not repeat, and examine your working capital. The QoE is where a price agreed in the LOI can quietly change. If the review finds your adjusted EBITDA is lower than you presented, the buyer often reduces the price to match, a move called a retrade. The best defense is having clean books and defensible add-backs before the process ever starts. A business with messy financials and aggressive add-backs invites a retrade; a business with tidy records and conservative adjustments rarely sees one.

How the buyer arrives at your number

Private equity prices a business on a multiple of its adjusted EBITDA. EBITDA is earnings before interest, taxes, depreciation, and amortization, a rough measure of the cash the business throws off. Adjusted EBITDA takes that number and adds back expenses that would not exist for a new owner. The valuation page walks the full bridge; the short version is that three kinds of add-backs matter most.

• Your own pay above market. If you pay yourself $600,000 to run a business a hired manager would run for $200,000, the extra $400,000 gets added back, because a new owner would only pay the market rate.
• Personal expenses run through the business. A vehicle, travel, a phone, or family members on payroll who do not work there get added back, if you can document them.
• One-time costs. A lawsuit, a bad storm, a system replacement, or a move that will not repeat gets added back so the buyer sees normal earning power.

Each defensible add-back raises adjusted EBITDA, and because the price is a multiple of that number, a single add-back can be worth many times its face value. An add-back that survives the quality of earnings review is worth its dollar amount times your multiple; an add-back that gets thrown out is worth nothing and can cost you credibility on the rest.

What the deal pays, and in what form

The headline price almost never arrives as one cash check. A typical services or trades deal splits the price into three parts: 60 to 70 percent in cash at closing, 10 to 40 percent as rollover equity in the buyer's holding company, and 5 to 10 percent held back in escrow for a year or two to cover any problems that surface after closing. On top of that, some deals add an earnout, where part of the price is paid later only if the business hits agreed targets, and some add a seller note, where the buyer pays part of the price over time with interest.

Rollover equity deserves special care, because it is where owners most often fool themselves. Rolling over means taking a minority stake in the combined company instead of cash. It can grow into a valuable second payout when the platform is sold again, but it is illiquid, it sits behind the group's lenders, and it can be worth nothing. The full mechanics, including how the payout waterfall works and what rights to ask for, are on the rollover equity page. The rule to carry into every deal is simple: never let the rollover be the reason the deal works. Size your life around the cash, and treat the rollover as a bonus you might receive.

What changes for you after the sale

The day after closing, you are an employee of the platform, not the owner of your company. Most deals include an employment or consulting agreement that keeps you running the business through a transition, commonly one to three years, and a non-compete that prevents you from starting a competing business for several years after you leave. Decisions you used to make alone now go through the platform. That is not a criticism of private equity; it is the nature of selling. But it is a real change in your daily life, and owners who did not expect it are the ones who struggle. If a large part of your identity is being the person who runs the show, weigh that honestly before you sign.

The money changes too. The business used to pay you a salary and distributions; after the sale that income stops and your new pay is whatever the employment agreement says, usually less than you paid yourself. Your business retirement plan and the tax benefits that came with ownership end. The after-sale plan covers how to replace the lost income and what to do with the proceeds, and managing rollover equity covers the stake you kept.

When you should not sell to private equity

Selling is the right move for many owners and the wrong move for some, and it is worth being honest with yourself about which you are. Do not sell if you would resent working for someone else and the transition period would make you miserable, because you will spend years in that seat. Do not sell if the business still has years of obvious growth ahead that you would be handing to the buyer at a discount, unless liquidity now matters more to you than a larger number later. Do not sell on a deal that only clears your needs because of a large rollover you are counting on, since that is a bet, not a plan. And do not sell before you have run the after-tax number, because the price after tax, fees, escrow, and rollover is often 30 to 40 percent below the headline, and the tax on the deal is decided by choices made before you sign.

What to do next

If an offer is on the table or you expect one, do three things in order before you sign anything. First, run the deal through the calculator so you know the real after-tax cash, not the headline. Second, read the valuation page to judge whether the multiple fits your industry and whether you are being priced as a platform or an add-on. Third, check whether the structure, especially the tax setup and any QSBS opportunity, is being handled in your favor, because those levers close once the letter of intent is signed. If you want a second read from a planner whose fee does not depend on whether you sell, including an honest answer about whether you need one at all, the advisor page and the contact page explain how that works.