The more debt it can sustain, the more it can arbitrage in valuation multiples, and the clearer it is about who the next buyer will be, the more attractive it becomes. Everything else matters less than you think.
When I am helping a business owner map out potential buyers for their company, we usually follow the same sequence.
First, we look at the larger competitors, both domestic and international, that might want to enter the market or continue consolidating it. Then we do some brainstorming around adjacent sectors that serve the same type of customer.
Next, we consider horizontal or vertical integration plays—companies one step up or down the value chain.
Finally, we list the private equity-backed buy-and-build platforms that are already making acquisitions in the sector.
From there comes the million-dollar question: “Could this also be interesting for a private equity fund?”
Because the more potential buyers we have on the table, the more competitive the process becomes—in other words, the higher the chances of getting the deal done and maximising value for our client (and, incidentally, our success fee).
In our experience, private equity funds can be an excellent option. They are highly professional in execution (they dedicate themselves fully to buying and selling companies), they have cash ready to deploy, they know how to structure deal financing, and it is not uncommon for them to pay higher multiples than strategic or industrial buyers (even if that may sound counterintuitive).
What needs to be understood is that the way they evaluate a company and decide whether it is a valid opportunity has almost nothing to do with how an industrial or strategic buyer looks at it.
A fund doesn’t buy companies—it buys value creation plans.
When a private equity fund looks at your company, it is not assessing whether it is a good business. It is assessing whether it fits its investment thesis and return profile. To simplify its analysis, it is essentially asking whether it can turn the investment into something that returns 2x or 3x the capital invested within a given timeframe, with a low risk of failure.
Private equity funds are conservative investors. They like to play it safe—unlike venture capital funds (which make 30 or 40 investments per fund, knowing that a few will be big winners, some will just return capital, and many will fail or become zombies). PE funds make 6 or 7 investments per fund, and they cannot afford for any of them to completely fail or even fail to return at least the invested capital.
In my experience speaking with funds during sale processes, the number they have in mind (not an official benchmark, just how they think) is usually an internal return target of around 15–20% per year. In other words, their minimum goal is to achieve a 2x return in five years. If the investment takes eight years, they are looking at a 3x return. An investment with these returns is not a star asset, but neither is it a failure. However, if their numbers do not show at least this level of return, they will quickly discard the opportunity.
So when a fund looks at your company, it is essentially working backwards and evaluating the three levers it can use to achieve its target return with controlled risk.
What are these levers?
Debt. The more debt it can put into the transaction, the less equity it needs to invest, and the higher the return on equity if everything goes well. If it buys a company for €50m, investing €20m in equity and €30m in debt, and sells it five years later for €80m after partially repaying the debt, the equity return is significantly higher than if it had invested the full €50m. This is the most mechanical of the three levers, as it depends less on growth and more on whether the company’s cash flow can support leverage without surprises.
EBITDA growth. The most obvious lever, but not necessarily the easiest to achieve. If they acquire a company with €5m EBITDA and exit it at €10m EBITDA, they have doubled the size of the business and, at a minimum, its value.
Multiple expansion. Buying a company at 6x EBITDA and selling it at 9x. This can happen because the sector becomes fashionable, because the company grows in scale (larger companies usually trade at higher multiples), or because risk is reduced and the business becomes more “institutional”.
Almost no deal relies on a single lever. When a private equity fund evaluates a company, it is thinking about how (and whether) it can combine all three:
How much leverage can this business support, and how stable are its cash flows to repay it?
Can I double, triple or quadruple EBITDA through market expansion, product growth, margin improvement, or acquisitions?
Is there room for multiple arbitrage in this sector and at this point in time?
The problem is not that your company is bad. It is that it is small.
You need to understand that a fund must deploy capital at a scale that makes sense for its own size. A €150m fund cannot build its portfolio by writing €5m equity cheques. It would need to do thirty deals to deploy the fund, which is operationally unfeasible in private equity. No team can manage 30 investments with the required level of attention. A €150m fund will want to deploy around €20m of equity per deal; a €1bn fund at least €100m per deal… and there are €25–30bn funds such as CVC, Blackstone or Apollo, where the deployment per deal becomes enormous.
So when an entrepreneur says: “But we are profitable, growing at 20% per year, with 25% EBITDA margins—we should be attractive to private equity, right?”
The answer is: maybe—but even the smallest funds (around €100–150m) typically need to deploy at least €20m of equity (plus debt) per deal, so it is very rare for a PE fund to acquire a company with less than around €5m EBITDA.
There is, in other words, a floor.
Once size is not an issue, the analysis essentially reduces to five main questions.
Can I generate multiple arbitrage through add-on acquisitions?
This is the classic “buy-and-build” strategy: acquire a platform company and then add smaller companies at lower multiples, generating arbitrage on each acquisition. For this to work, the fund needs to see a fragmented market, real integration capability, and a platform strong enough to absorb future acquisitions.
If your company is the platform, the fund will pay a fair multiple precisely because it knows it can buy the next ten businesses more cheaply. If your company is one of the fragmented building blocks, it may still be acquired—but likely by the platform or another buyer, usually at a lower multiple.
Can this grow through capital injection?
Restaurants, retail, clinics, gyms, subscription services with high CAC (Customer Acquisition Cost) but strong LTV (Lifetime Value). These are businesses that work, but need capital to grow faster than cash flow allows.
The fund’s question is simple: “If I inject capital into this model, can I scale significantly without breaking unit economics?”
If opening a gym costs €500,000, becomes profitable in 12 months, and pays back in 3.5 years—and that holds consistently across locations—there is a clear investment thesis. If the unit economics deteriorate at scale, there is no thesis, no matter how healthy the current business is.
How much margin is hidden due to inefficiency?
This is the favourite question of operational improvement funds. They look for pricing upside, better procurement, improved reporting, professionalised sales processes, and the closure of unprofitable divisions.
Can this sustain the debt I need to put on it?
The fund asks: “Does this business generate stable enough cash flow to support leverage without a single bad quarter breaking covenants?”
They analyse recurring revenue, churn, contract length, customer concentration, working capital, capex requirements, and especially how much EBITDA converts into free cash flow.
An EBITDA of €5m that converts into only €2m of free cash flow cannot support the same debt as one that converts almost fully into cash.
And most importantly: who am I going to sell this to in five years?
Funds buy with the exit already in mind—another fund, a strategic buyer, or an IPO.
If they cannot see the exit, none of the other factors matter.
I am Joshua Novick, Managing Partner at Bondo Advisors.
We help founders and business owners through company sale processes.
If you are thinking about selling, or simply want to understand what your company might be worth today, get in touch and we can talk.
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