Burkland Brief

  • PE buyouts are increasingly targeting small and midmarket businesses.
  • Buyers want clean books, strong margins, and recurring revenue.
  • Owner dependency and customer concentration drag down valuations.
  • Scalable systems and leadership depth increase valuation.
  • A buyout isn’t always a clean break. Many owners sell a majority stake, roll equity, and stay on temporarily.

Private equity firms aren’t just circling Fortune 500 giants. Increasingly, they’re targeting small and mid-sized businesses. In fact, PE firms closed 3,352 U.S. middle-market buyouts in 2024 worth $358.2B. More than 1,500 of those were sub-$25M deals, one of the highest totals on record, according to a recent report from the American Investment Council.

For business owners, this trend means a buyout could provide liquidity, a staged exit, and a chance to capture additional upside when the company is sold again. The question is: will your business be ready when the call comes?

What Private Equity Buyers Care About

Private equity buyers are different from strategic acquirers. They’re financial investors first, with sharp eyes on predictable cash flow and scalable operations.

Top factors private equity firms evaluate:

  • Recurring Revenue: Subscriptions, contracts, or repeat customers outweigh one-off projects.
  • EBITDA Margins: Healthy earnings show efficiency and long-term scalability.
  • Customer Concentration: Reliance on a small set of customers increases risk.
  • Management Depth: Strong teams ensure continuity beyond the founder.
  • Scalability: Systems and processes that can handle 2–3x growth without breaking.

Financial Preparation

Sloppy or inconsistent financials will sink your valuation fast. Clean reporting is the baseline for being taken seriously.

✅ Financial Prep Checklist

  • 24–36 months of accurate financial statements (ideally GAAP-compliant)
  • Monthly closes within 5–10 days
  • Audited or at least reviewed financials
  • Clear revenue recognition policies
  • Forecasts with base, upside, and downside scenarios
  • Tracking of KPIs like gross margin, customer acquisition cost, lifetime customer value, and churn
  • Up-to-date tax filings with federal, state, and local compliance documented

Pro tip: Most PE firms commission a Quality of Earnings (QoE) report. If your books aren’t ready, this report will expose weaknesses that cut your valuation.

📄Related Article: What Financial Records Should My Business Keep?

Operational Preparation

Finance isn’t the only area under the microscope. PE firms will scrutinize how your business runs day-to-day. A business with a clear growth strategy, a strong culture, and documented processes is more attractive than one that relies on instinct and owner intuition. Demonstrating that your company can continue thriving without you in the day-to-day is one of the most powerful signals you can send to potential buyers.

Areas to tighten up:

  • Owner Dependency: If the business can’t run without you, buyers will hesitate.
  • Contracts: Strong, transferable agreements with customers and suppliers.
  • Retention Metrics: Low churn and clear customer lifetime value.
  • Process Documentation: Written SOPs for critical workflows.
  • Systems: Scalable ERP, CRM, payroll, and HR tools beyond spreadsheets.

Deal Readiness

Private equity deals move fast, and surprises can cost you. Even if you’re not actively seeking PE investment, understanding deal mechanics now prevents surprises later.

Key Area What It Means Why It Matters Owner Action
Valuation Multiples Buyers value your company as a multiple of EBITDA (earnings) Sets your sale price; every “turn” higher or lower can change value by millions Learn your industry’s range and see where you stack up
Quality of Earnings (QoE) Independent review of your financials Buyers use it to test if your earnings are real and repeatable Consider commissioning your own QoE before going to market
Working Capital The amount of cash, receivables, and payables the buyer expects you to deliver at close If you come in short, the price gets adjusted down Track and normalize working capital well before a deal
Tax Compliance Federal, state, and local filings, plus payroll and sales taxes Unpaid liabilities reduce price; clean filings build buyer trust Ensure tax returns are current, fully documented, and align with your books
Bank Covenants Restrictions in your loan agreements Can limit dividends, new debt, or acquisitions Review loan terms now and negotiate flexibility if needed
Earn-Outs Part of the price tied to future performance Can reduce your payout if targets aren’t hit Understand how earn-outs are structured and begin tracking performance metrics buyers are likely to use

Owners often wait until they’re ready to sell to start preparing, but that’s too late to make meaningful improvements. Reducing customer concentration, professionalizing reporting, and strengthening leadership teams take time. Often years, not months. Starting early gives you flexibility: if PE interest arises unexpectedly, you’ll be ready, and if it doesn’t, you’ll still benefit from running a stronger, more resilient business.

The Cultural Mindset Shift

For many owners, their business represents decades of work, identity, and relationships. Transitioning to PE ownership means redefining your role and your relationship with the company. Some owners stay on to help drive the next phase of growth, while others step back quickly. Either way, preparing yourself emotionally for the change is just as important as preparing your books.

  • Reporting Cadence: Monthly board-ready financials, KPI dashboards, and deep dives replace informal updates.
  • Governance: Control moves to the PE firm; expect to seek approval on major strategic and financial decisions.
  • Pace: Growth expectations climb. Efficiency gains, margin improvement, and scaling become the daily focus.
  • Exit Planning: A buyout isn’t always a clean break. Many owners sell a majority stake, roll some equity, and stay on in a leadership or advisory role. PE firms often aim to exit in 3–7 years, at which point you may benefit again if you’ve rolled equity.

A Roadmap to PE Readiness

Think of PE readiness as building a stronger business, regardless of whether you sell.

  1. Get the books in order.
  2. Diversify customer concentration.
  3. Build leadership depth beyond the owner.
  4. Upgrade finance and operational systems.
  5. Track and report KPIs consistently.
  6. Engage experienced M&A advisors early.

Final Word

Private equity buyers reward businesses that are solid, scalable, and credible. Preparing now positions your company to grow stronger and sell higher. Whether or not you pursue a deal, the work you do now will increase resilience, valuation, and optionality down the road.

Owners who try to manage a buyout process alone are at a disadvantage. PE firms bring teams of experienced negotiators and analysts to the table. Having your own team—a fractional CFO, a legal advisor experienced in M&A, and a tax professional—levels the playing field. These advisors help you prepare and protect you from leaving money on the table during negotiations.

Burkland helps small and midmarket businesses strengthen financial operations, reporting, and systems so they’re ready when private equity comes knocking. Contact us today to discuss your PE readiness.