Might a Private Equity firm back your business?
The sheer diversity of financial buyers in the UK’s M&A ecosystem creates exit opportunities that some business owners may not have considered.
At Rockworth, many of our clients begin with the assumption that the only realistic option for selling their business is a trade sale. The idea of selling to private equity is sometimes met with scepticism, often due to a perception that PE firms are only interested in rapid growth opportunities or that they are simply looking to strip assets.
The reality is much more nuanced. The private equity industry has diversified significantly in recent decades and, for many business owners, a financial buyer can bring real advantages. As such, for most exits that we work on, it is common for both trade buyers and financial buyers to be on our radar.
Defining Private Equity
Private equity encompasses a broad spectrum of financial investors with an interest in acquiring or investing into privately owned companies. Some do pursue aggressive growth strategies. Others operate more like conglomerates, targeting stable cash generation and long-term ownership.
This variation in fund strategies means there is far more opportunity for SME owners to sell to private equity than many realise. At Rockworth, we maintain relationships with numerous financial buyers across different sectors and can introduce your business to investors whose objectives align with yours.
“My business is too small for PE”
One common assumption is that private equity only invests in larger companies. In reality, the UK has a thriving ecosystem of smaller PE funds. Many of these target businesses generating profits of around £1m to £5m, with some investing at even lower profit thresholds where the fundamentals are compelling.
In addition, many smaller companies can be attractive “bolt-on” acquisitions for businesses that a private equity fund has already invested in. If your company could be a strategically valuable addition to a larger, PE-backed group, the pool of potential buyers widens considerably, even if you do not meet the typical size criteria for a standalone platform investment.
“My business isn’t growing fast enough”
There remains a number of funds whose strategy is to pursue ‘quick flips’, with the classic objective of achieving 2–3x returns over a 3–5 year holding period. However, this no longer accurately captures how most funds operate. The majority now expect holding periods of five to seven years or longer, and some investors even adopt a “buy-and-hold-forever” approach, functioning as diversified industrial groups.
For these investors, the primary objective is to own a portfolio of businesses generating stable, robust cash flows. As such, your business does not need to be delivering constant double-digit profit growth in order to be of interest to financial buyers.
Growth rates can also be less important when a private equity fund is interested in acquiring your business as a bolt-on to an existing investment. In this case, the investor’s financial return may come from valuation arbitrage, where the profit multiple used to value your business is lower than the multiple achieved by the larger combined entity on exit.
“A financial buyer will strip my business for parts”
Perhaps the most outdated view of private equity dates back to the high-profile asset-stripping stories of the 1980s. Today’s reality is very different. For almost all financial buyers, true value creation comes not from breaking up a business, but from sustained investment and operational improvement.
That said, it is true that PE buyers will scrutinise your cost structure and seek to eliminate inefficiencies. They may reduce overheads, consolidate certain functions, or upgrade systems and processes. The goal, however, is to create a stronger, more resilient and more operationally sound business. A private equity firm cannot achieve a meaningful valuation multiple at exit if it has hollowed out the company along the way.
“They’ll never let me leave”
The future success of any business depends on its management team. It is therefore true that private equity buyers will want to retain the individuals who are critical to the company’s performance. Earnouts and equity incentives are often included in deal structures to keep key people motivated and aligned with the investment goals.
The positive side of this approach is that owners can take money off the table now, while still benefitting financially from the future growth of the business. However, if your goal is to retire soon after an exit, longer-term incentives may be of limited interest. If you are looking to step away, you need to ensure the business is not overly dependent on you and that there is a strong management team in place that the buyer can back.
A financial buyer will be perfectly happy to engineer a deal that allows you to retire, provided it is genuinely the case that the business can function without you. In practice, this is a question of succession planning and management depth, rather than the type of buyer.
The advantages of PE deals
A trade buyer typically acquires your business with the intention of integrating it into a larger organisation. This often means brand consolidation, system integration, and potential disruption for the business and its employees.
By contrast, when a financial buyer acquires your business, there is often a greater likelihood that the company will continue to operate as a standalone entity. This can be an attractive proposition, particularly for sellers who wish to preserve brand, legacy and a degree of operational independence.
Additionally, private equity deals can frequently be tailored to your objectives in ways that trade sales cannot. Whether you seek a clean exit, partial liquidity with ongoing involvement, or a structured earn-out, financial investors often have flexibility in how they structure transactions.
The starting point
You should not assume that a trade sale is your only viable path. Financial buyers may be interested, particularly if your business demonstrates strong market positioning, recurring revenues, a capable management team and access to growing markets. The challenge is that smaller private equity investors with appropriate strategies are less visible and harder to locate independently.
That is precisely where an advisor like Rockworth can add value. By understanding your objectives, sector and business profile, we can identify the right financial buyers from our network and position you for a transaction that aligns with your goals.
If you would like to explore whether private equity might be suitable for your business, Rockworth can help you assess your options and connect you with appropriate investors.
