What Private Equity Firms Look for in Small and Medium-Sized Businesses

Private equity firms don’t just wake up one morning, rub their hands together, and decide to buy a random small or medium-sized business (SMB) because they like the logo. No, these firms have a very particular set of skills, honed over years of scrutinizing balance sheets, dissecting EBITDA margins, and executing due diligence with all the warmth of a forensic auditor on a caffeine bender.

If you’re running an SMB and hoping to attract private equity (PE) investment, you need more than just a solid business—you need to look irresistible on paper and in practice. PE firms want returns, not charity cases, and they have a long checklist of criteria that will determine whether your business is a hidden gem or just another unscalable mess.

Let’s cut through the fluff and break down exactly what these firms are looking for—so you can either prepare accordingly or abandon ship before wasting everyone’s time.

Profitability (Because Charity Work Isn’t in the Business Model)

Here’s the deal: PE firms are in the business of making money. Lots of it. If your company isn’t generating solid, predictable profits, don’t expect much interest—unless, of course, you’ve somehow managed to convince investors that you’re the next Uber-for-everything.

Key Metrics PE Firms Care About:

• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): This is PE firms’ love language. The higher, the better. If yours is negative, you’re either a tech startup burning through VC money or a sinking ship.
• Gross Margins: If you’re selling something at razor-thin margins and relying on volume to survive, PE firms will need to see a clear path to improvement—or a miracle.
• Cash Flow Stability: Unpredictable revenue is the corporate equivalent of mood swings. PE firms want steady, recurring cash flow, not one-time windfalls. Subscription-based models and long-term contracts? That’s the stuff of PE dreams.

Translation: If your business isn’t throwing off significant, predictable cash, private equity firms will look elsewhere—probably at your better-run competitor.

Growth Potential (Or at Least the Ability to Fake It Well)

Private equity isn’t just about acquiring stable businesses—it’s about acquiring stable businesses with room to grow. Stagnation is a deal-breaker. If you’ve hit a revenue plateau and have no scalable plan to break past it, you’re about as appealing as a flip phone in the age of AI.

How PE Firms Assess Growth Potential:

• Market Expansion: Can your business expand geographically, enter new markets, or add new verticals? Or have you already exhausted every conceivable revenue stream?
• Scalability: Will more capital and resources make your business exponentially more profitable, or will growth simply add complexity and headaches?
• Industry Trends: Are you operating in an industry with strong tailwinds, or is your sector about to be steamrolled by technology, regulation, or changing consumer habits?

A good rule of thumb: If you can make a convincing case for why a PE firm can 2x, 5x, or even 10x their money within a few years, you’re on the right track. If your best answer is “We work really hard,” that’s adorable, but irrelevant.

Solid Management Team (Or at Least One That Won’t Set the Place on Fire After the Sale)

PE firms are not in the business of babysitting. They want a leadership team that can operate independently and execute a strategic growth plan without calling for a lifeline every five minutes.

What PE Firms Look for in a Management Team:

• Competence & Experience: Can your team actually run a company at scale, or are they a collection of glorified startup founders who panic at the first sign of turbulence?
• Continuity: If the entire business collapses the moment the founder leaves, that’s a major red flag. PE firms want to know that institutional knowledge won’t walk out the door post-acquisition.
• Adaptability: The firm may implement new operational strategies post-acquisition—if your leadership team can’t pivot or resists change, they’re a liability.

Bottom line: If your business runs like a well-oiled machine with or without you, PE firms will see that as a major plus. If your departure would cause the company to implode, that’s an operational nightmare waiting to happen.

Competitive Advantage (Because “Just Another XYZ Business” Won’t Cut It)

If your main selling point is that you’re decent at what you do, congratulations—you’ve just eliminated yourself from contention. PE firms want businesses with a competitive edge, whether that comes from proprietary technology, unique branding, high customer loyalty, or a market position that’s hard to replicate.

Competitive Differentiators That Matter:

• Intellectual Property: If you own patents, proprietary tech, or trade secrets, PE firms will love you. If you’re just reselling a slightly different version of something that already exists, you’re forgettable.
• Customer Stickiness: High switching costs? Long-term contracts? Fanatical brand loyalty? These make your company harder to displace, which makes you more valuable.
• Economies of Scale: If your business becomes more profitable as it grows (rather than collapsing under its own weight), that’s a green flag.

The harsh truth: If your only differentiator is “We have great customer service,” PE firms will smile, nod, and then move on to a business that actually has a moat.

Clean Financials (Because Nobody Wants to Buy a Dumpster Fire)

This one’s non-negotiable. If your books are a mess, private equity firms will run faster than a teenager dodging chores. If your financials are riddled with “adjustments,” “one-time expenses,” or “non-GAAP metrics” that sound like they were invented to hide reality, expect a hard pass.

Financial Red Flags That Kill Deals:

• Messy Accounting: If your accountant still uses a shoebox full of receipts and an Excel spreadsheet from the Stone Age, fix that before approaching PE firms.
• Hidden Liabilities: Undisclosed debts, pending lawsuits, or “creative” tax strategies will get uncovered in due diligence—and will likely kill the deal.
• Revenue Recognition Shenanigans: PE firms can smell revenue manipulation a mile away. If your books look too good to be true, they’ll assume they are.

The cleaner and more transparent your financials, the smoother the acquisition process will be. If due diligence turns up more surprises than a reality TV show, expect PE firms to ghost you faster than a bad Tinder date.