Hollywood may have portrayed acquisition-minded investors like Larry the Liquidator, but in reality, private equity funds are far from the villainous characters they often appear to be. In fact, their priorities and strategies are transparent, predictable, and rooted in a clear goal: maximizing investor returns.
Private equity funds typically approach potential acquisitions with two primary objectives: driving earnings growth and enhancing valuation for a successful exit strategy. While these two objectives often overlap, it’s helpful to break them down separately to understand the motivations behind private equity funds.
The “private” nature of private equity funds allows them to take a long-term view, looking at each potential acquisition through a unique lens. They expect returns significantly higher than traditional debt investors or commercial banks, which tend to take a narrower, more actuarial approach to return on investment. With this in mind, private equity funds focus on acquiring businesses already positioned for growth while minimizing downside risk.
As business owners consider a sale, understanding what private equity funds prioritize can help them prepare. Key factors include founder retention, growing markets, scalability, earnings durability, and a consistent focus on valuation.
One critical aspect of selling to a private equity firm is the potential for founder retention. Private equity funds often prefer to retain the expertise and knowledge of the company’s founders. While this may not always align with a seller’s desire to walk away, it can be seen as a compliment to the value the founder brings to the table. Employment agreements or consulting arrangements may be negotiated as part of the sale.
In some cases, private equity firms engage in “roll-ups,” acquiring several companies within the same sector to achieve economies of scale. These strategies can involve creating new management teams with operational experience in the sector, and whether or not the founder remains involved will depend on the firm’s strategy.
Small- and mid-cap companies that are well-established in markets that are growing are primed to pique the interest of private equity funds. That interest goes beyond merely wanting to ride a wave of growth in a sector – funds have confidence in their ability to equip their portfolio companies to improve performance and grow faster than their markets as a whole. Notably, while companies with a growing share of a shrinking market can be a strategy for increasing value and driving revenue, it is unusual.
Companies operating in sectors with opportunities for growth but high barriers to entry similarly catch the eye of fund analysts. High barriers to entry (the costs of building a factory, or the essential nature of proprietary intellectual property to operations, for example) are indicators that revenue streams for existing players in that sector will be relatively durable. As we note below, durable earnings are a focus of funds’ analysis.
For private equity, scalability is a major factor in their investment strategy. Scalability refers to the ability of a business to increase revenue at a rate greater than its costs. Private equity funds are drawn to businesses that can scale efficiently, often identifying technology deficits as opportunities to invest in systems that drive greater revenue without proportional increases in costs.
If a business is operating with outdated systems, private equity funds may see an opportunity to modernize and scale it rapidly. This scalability focus often drives post-acquisition growth strategies.
For private equity funds, earnings durability is paramount. They are institutional investors with a fiduciary responsibility to deliver consistent returns to their investors. As such, funds carefully evaluate a company’s earnings history, particularly during periods of market uncertainty. For example, understanding how a company’s earnings held up during economic challenges like the COVID-19 pandemic can be a key factor in its attractiveness as an acquisition target.
Private equity firms are constantly focused on enhancing the valuation of their portfolio companies. While they acknowledge the importance of relationships with founders, staff, and customers, their decisions are ultimately driven by the goal of increasing a company’s financial value. Understanding that improving valuation is their primary motivation helps sellers navigate the negotiation process more effectively.
One of the most important realities for lower middle market sellers is the knowledge and experience mismatch between private equity buyers and founder-owner operators. Private equity firms evaluate hundreds—sometimes thousands—of deals each year, supported by seasoned deal teams, top-tier attorneys, and accounting experts. By contrast, most founders go through a sale only once in a lifetime. Without the right sell-side advisor, that imbalance can result in a suboptimal deal—or no deal at all.
Private equity firms also differ widely. The world in which funds and their underlying investors operate is affected by factors that can be completely unrelated to the business of the companies they acquire. Understanding those differences, anticipating PE buyer strategies, and negotiating from a position of experience are what distinguish Optima Mergers & Acquisitions in our work as a sell-side advisor.
We’ve been in your shoes. Our team’s expertise in navigating private equity gives us the ability to level the playing field, protect your interests, and drive toward the best possible outcome.
Contact Optima Mergers & Acquisitions today to learn more about how we can help you navigate the sale process and achieve the best possible outcome.
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Optima Mergers & Acquisitions has been nominated for three 2025 M&A Advisor Awards for its role in the Acquisition of Texas Ecogrow by NextGen Partners.
