What Investors Want: Key Financial Metrics That Attract Private Equity

Let’s clear the air. Private equity firms are not your friends. They don’t care about your company culture, your inspirational leadership, or the fact that your break room has a kombucha tap. What they care about is one thing: numbers that make sense.

If your financials scream “profitable, scalable, and sustainable,” PE firms will be all over you like a Wall Street bro on a bonus check. If they see red flags—poor margins, erratic cash flow, or financial engineering that makes Enron look conservative—they’ll be out the door before you can even schedule the next round of due diligence.

So, what exactly makes a company attractive to private equity? The answer lies in a handful of key financial metrics that separate the winners from the soon-to-be-acquired-for-scrap. Let’s dive into the data points that make investors drool—and the ones that send them running for the hills.

EBITDA: The Ultimate BS Detector

In the world of private equity, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the Holy Grail. It’s the shorthand for how profitable your company is—before all those pesky financial obligations get in the way. Of course, some creative entrepreneurs use it as a way to pretend their business is healthier than it actually is, which is why PE firms approach EBITDA with both reverence and skepticism.

Adjusted EBITDA: A Love Letter to Creative Accounting

A company’s EBITDA can be a beautiful thing—until it’s “adjusted.” If your EBITDA suddenly looks 30% better because you decided that “one-time” expenses should be ignored (even though they suspiciously appear every quarter), private equity firms will take notice. Adjustments that make sense—such as normalizing one-time legal fees—are fine. But if your EBITDA adjustments require a whiteboard session and an Excel model longer than your latest term sheet, expect some raised eyebrows.

The EBITDA Margin: Thick or Thin?

A high EBITDA margin is a double-edged sword. On one hand, a 40% margin tells PE firms your company is a cash-printing machine. On the other, it makes them wonder if you’re price-gouging customers or slashing costs so aggressively that the moment they take over, all the problems you buried under the rug will explode. If your margins are thin, that’s another problem entirely—it suggests your cost structure is unsustainable or your pricing strategy needs a rethink. Either way, PE firms are watching.

Revenue Growth: Show Me the Money, But Make It Sustainable

Every CEO loves to show off a revenue graph that looks like a SpaceX launch trajectory. But revenue growth isn’t just about speed—it’s about sustainability. Private equity firms want companies that are growing, but not at the expense of long-term profitability.

YoY Growth vs. Smoke and Mirrors

If your revenue has doubled in the past two years, great. But PE firms want to know how it happened. Did you land one whale client that will vanish next year? Did you jack up prices with no long-term retention strategy? Did you “sell” a ton of product to your cousin’s company at a 95% discount just to boost numbers before an acquisition? Private equity firms will pull apart every detail of your YoY (year-over-year) growth, so if there’s smoke and mirrors, expect them to find it.

Recurring Revenue: The PE Love Language

Nothing makes an investor happier than a steady, predictable revenue stream. That’s why SaaS businesses and subscription-based models get absurd valuations while transactional businesses get scrutinized. If a private equity firm sees that 80% of your revenue is locked in via long-term contracts, they’re already preparing the term sheet. If your revenue is entirely dependent on new sales every quarter, expect some tough questions about churn and customer retention.

Cash Flow: The Unsexy Yet Essential Metric

If revenue growth is the flashy sports car, cash flow is the reliable engine under the hood. A company can look profitable on paper while hemorrhaging cash in reality. Private equity firms know this, which is why they focus on free cash flow (FCF) as one of the most important financial metrics in an acquisition.

Free Cash Flow (FCF): The Real Bottom Line

Net income is nice, but free cash flow is what actually determines whether a company lives or dies. PE firms love to see strong FCF because it means there’s money to reinvest in growth—or, let’s be honest, to service the inevitable debt they’re going to load onto the company. If your business is showing solid cash flow, expect to be a hot commodity. If your cash flow is a mess, you’d better have one hell of a story to explain why.

Burn Rate and Runway: Can You Survive Without Daddy’s Money?

Private equity firms are not venture capitalists. They don’t want to see a business that survives only through constant fundraising rounds. If you’re burning through cash faster than a tech startup at an open bar, you’re not going to look attractive to PE. They want companies that can stand on their own financial legs, not ones that require ongoing infusions of capital just to make payroll.

Return on Invested Capital (ROIC): The Sniff Test for Real Value

If EBITDA is the appetizer and cash flow is the main course, then Return on Invested Capital (ROIC) is the dessert—the final confirmation that a company actually generates value rather than just moving money around.

Why ROIC Is the Private Equity Litmus Test

ROIC measures how effectively a company uses its capital to generate returns. If your ROIC is strong, it means your business model is efficient, and you’re turning investments into real profit. If your ROIC is weak, private equity firms will assume you’re either mismanaging capital or trapped in a low-margin business. Either way, not a great look.

Comparing ROIC to Industry Standards: Are You Special or Just Average?

A 15% ROIC might be impressive in one industry and laughably bad in another. PE firms will benchmark your ROIC against industry peers to determine if your business is a true outperformer or just another mediocre operation in a crowded market. If your numbers don’t stack up, expect some tough negotiations ahead.

Debt Metrics: The Fine Line Between Leveraged Growth and Financial Suicide

Debt is like cholesterol—there’s good debt and bad debt. Some leverage is necessary for growth, but too much turns your company into a ticking time bomb.

Debt-to-EBITDA Ratio: A Love-Hate Relationship

PE firms love leverage—when they control it. A reasonable Debt-to-EBITDA ratio shows that your company can handle obligations while still being profitable. But if your debt is already sky-high before they even step in, expect them to either demand restructuring or walk away entirely. No one wants to inherit a financial mess.

Interest Coverage Ratio: Are You Even Capable of Paying Your Bills?

PE firms don’t want to play debt collector. If your interest coverage ratio is razor-thin, it signals that even a minor economic downturn could send your company into a death spiral. If you can’t comfortably service your existing debt, don’t expect investors to line up for a bidding war over your business.

The Investor Checklist—What Really Matters

Private equity investors are not sentimental. They don’t fall in love with your vision—they fall in love with your numbers. If your financial metrics align with their expectations, you’ll have a shot at securing investment. If your numbers are a mess, you’re wasting everyone’s time.

At the end of the day, private equity isn’t looking for perfection. They’re looking for businesses that make financial sense, can scale efficiently, and won’t collapse the second the ink dries on the deal. Make sure your metrics tell the right story—before an investor does it for you.