6 Things PE Firms Look For in Acquisition Targets | by Frank Mastronuzzi @ Greenough Group

Frank Mastronuzzi
4 min readNov 20, 2020

For many established business owners with growth-oriented businesses, private equity acquisition is an avenue for meaningful investment capital. Unlike venture capital which invests primarily in startups, private equity focuses on the leveraged buyout (LBO) of businesses with proven business models but may need a shot of capital and a new strategic direction to take them to the next level.

2019 saw $450 billion in private equity deals , and the value of over half of private equity deals are between $50 million and $1 billion , so it’s easy to understand why private equity firms have a stringent due diligence process. In order to be considered as a candidate for private equity backing, there needs to be enough evidence that the firm will see a return on their investment.

Whether you’re looking to sell your business and make a move, seek expansion capital to guide you towards an initial public offering (IPO), or replace existing investors, investment from a may be a smart move. Of course, private equity does come with many caveats — the firm may insist on a new business plan, install their CFO and other staff on the board of directors, or even choose to replace the leadership team. Regardless, this capital can be a godsend if your growth prospects are hindered by being overextended on loans.

Here are seven factors that private equity firms use to assess businesses as a part of the private equity acquisition process.

1. Market Position and Competitive Advantages

A strong LBO target will hold a competitive position within its industry and have the potential for sustainable growth.

A competitive business plan must:

  • Be unique and visionary within the industry
  • Hold the promise of great value for the customer
  • Include comprehensive short and long-term plans
  • Include a SWOT analysis for both potential partners and competitors
  • Have a proper risk management plan in place

While PE firms will often want to tweak your business plan upon acquisition, you need to have a strong plan in place to begin with to make a case for investment.

2. Multiple Avenues of Growth

A successful business can’t have all its eggs in one basket. Firms will look for an acquired company to have multiple drivers of growth including new locations, a customer acquisition strategy / upselling strategy, or exploring new markets.

Some of the key factors assessed for growth potential include:

  • The state of the market landscape for the industry
  • The size of the current and potential markets
  • A history of notable successes
  • A stable existing customer base

3. Stable, Recurring Cash Flows

Growth requires spending, and rapid growth does not always result in a significant influx of capital, mainly if your cost-per-acquisition is still high. A PE-backed portfolio company needs to have steady and reliable cash flows, or the PE firm would not be able to meet its interest payments.

A PE firm will always have a view of operating costs, sales, overhead, assets, liabilities, inventory, and the cost of increasing human capital. As part of the growth plan, the for, will also have an eye on the costs associated with any upgrades to processes, software, or physical locations.

4. Low Capital Requirements

Unlike venture capital where multiple rounds of investment are the norm, PE firms will look to invest in businesses that they feel can be self-sustainable after one investment. If a business is in such dire straits that it seems unlikely that a single round of investment can right the ship, it likely won’t be an ideal PE target.

5. Favorable Industry Trends

A PE firm will be looking at how much a company is leveraging trends and disruptive technology within its industry as a major criterion for investment. The company’s mission and vision need to align with the potential for innovating and transforming the industry to be completely unique. Some examples include AI and automation, changing consumer behavior, new disruptive technology, regulation, etc.

6. Strong Management Team

A PE firm will look for a company with a strong management team and organizational structure to justify equity investment. This team should have a proven track record of being able to identify key opportunities, mitigate the risks presented by various challenges, and pivot quickly when needed. Having a strong foundation of leadership is key, as it’s always easier to retain a strong management team then have to seek a new one.

Consulting Services For Businesses Seeking or Weighing PE Investment

If your mid-market business needs assistance in optimizing for private equity capital investment — Greenough Group is here to help.

Tailoring your business to meet the investment needs of a PE firm is a unique skill that’s often difficult to find. The majority of GCG’s executives have been portfolio company professionals with extensive experience in multinational investment partnerships, who can bring a deep understanding of the regulations and requirements PE firms desire.

Contact us today for a free consultation and learn how we can support the health and expansion of your business.

Originally published at https://www.greenoughgroup.com on November 20, 2020.



Frank Mastronuzzi

Founding Partner @punchfinancial, VP Business Development @GreenoughGroup, CFO, MBA, SF-Based, consummate optimist, proud zio, proud daddy of Luca, the Wheaten