How to Sell a Business to Private Equity

The short answer

To sell a business to private equity you hire a sell-side advisor, spend six to twelve weeks getting the numbers into a form a fund will underwrite, run a confidential auction to a list of sponsors, take indications of interest, host management meetings, sign a letter of intent with one buyer, and then spend two to three months in confirmatory diligence before closing. A middle-market process usually takes six to nine months end to end: 6-12 weeks of pre-marketing, 8-14 weeks of marketing, 2-4 weeks negotiating the LOI, and 8-12 weeks of exclusivity and closing (PCE Investment Bankers).

The part nobody tells you up front: the number in the LOI is not the number that reaches your bank account, and almost all of the gap between the two is decided after you have signed away your right to talk to anyone else. This guide walks the process in order, then does the arithmetic on what actually lands.

Why a fund is calling you in the first place

It is not flattery, and it is not personal. The buyout industry is sitting on roughly $1.3 trillion of committed-but-unspent capital, deployed $904 billion of buyout value in 2025 (up 44% year on year), and is holding some 32,000 unsold portfolio companies worth about $3.8 trillion (Bain & Company, Global Private Equity Report 2026). Capital that is committed but not invested earns no carry. That is the pressure behind the cold calls.

It cuts both ways. Real competition for good lower-middle-market companies is genuinely in your favour on price. But the same report puts the average holding period at exit at around seven years, against five to six years from 2010 to 2021 - which matters enormously if part of your consideration is equity you roll into the new company rather than cash.

The process, stage by stage

1. Preparation (6-12 weeks)

Before anything goes to market, your advisor normalizes EBITDA, builds the confidential information memorandum, and assembles the buyer list. Normalization is where owner compensation, personal expenses, one-time legal costs and non-market rent get added back - and it is worth being conservative, because every add-back you claim will be tested later by a buy-side quality-of-earnings team. A sponsor underwrites off a number it can defend to its own investment committee, not the number on your tax return. How private equity values a company covers what survives that scrub.

This is also the stage where a seller decides what they are optimizing for, which is a different question from what the business is worth. If you have not framed that yet, work through exit planning for business owners before you commission a CIM.

2. Marketing and indications of interest (8-14 weeks)

Teasers go out under NDA, the CIM follows, and interested funds submit non-binding indications of interest - usually a valuation range rather than a number. Management meetings follow for the shortlist. Two things are being tested in those meetings that are not in the CIM: whether the company runs without you, and whether your leadership team will stay. Both move price, and the second one moves it more than most owners expect.

3. The letter of intent (2-4 weeks to negotiate)

You pick one buyer and sign an LOI. Almost everything in it is non-binding - price, structure, the buyer's financing plan - with one glaring exception: exclusivity. From signature until the exclusivity period lapses, you cannot talk to another buyer. Your leverage, which was built entirely out of having alternatives, is now gone for the next 60 to 90 days.

That asymmetry is the single most important thing to understand about a sponsor process. Negotiate the mechanisms in the LOI, not just the headline price: how the working capital target will be set, the size and duration of any escrow, whether there is an earnout and on what metric, and exactly how much equity you are required to roll. Terms left vague in the LOI get resolved during exclusivity, when only one side can walk away cheaply.

4. Confirmatory diligence and closing (8-12 weeks)

A buy-side quality-of-earnings review, legal diligence, customer calls, and the purchase agreement itself. In parallel the fund arranges the acquisition debt, most of which is secured against the company you are selling rather than the fund's own capital - the mechanics are in how private equity finances a buyout. If the debt markets move against the deal during this window, the price can move with them.

What actually lands: a worked example

The company below is invented. The numbers are arithmetic on a hypothetical, not a quote, a projection, or a description of any transaction.

Take a business with $6 million of normalized EBITDA and no funded debt. GF Data's sponsored-deal figures put the $25M-$50M enterprise value band at 6.8x year to date through Q3 2025, with the $10M-$25M band at 6.4x (Capital Pad, citing the GF Data ESOP Advisor Special Report). At 6.8x, the headline enterprise value is $40.8 million. Here is the walk from that headline to the wire.

Line	Amount	Why
Headline enterprise value (6.8x $6.0M)	$40.8M	The number in the LOI and the one you repeat at dinner
Working capital true-up, short of the peg	-$0.4M	Adjustments owed to buyers averaged about 0.9% of transaction value
Seller-side fees (advisory, legal, QoE)	-$1.2M	Roughly 3% at this deal size; paid out of your proceeds
Required rollover equity, 25%	-$10.2M	Reinvested in the new company, not banked
Escrow for the price adjustment, held ~12 months	-$0.4M	Median special-purpose escrow runs about 1% of transaction value
Cash at close, before tax	~$28.6M	70% of the headline

The escrow and working capital figures come from SRS Acquiom's M&A Deal Terms Study, which found that more than three-quarters of deals included a special-purpose escrow for the purchase price adjustment, that the median size of that escrow held at about 1% of transaction value, and that working capital adjustments are now close to universal - present on only around half of deals a decade ago (SRS Acquiom). None of these lines is a trick. They are standard. They are simply not part of the conversation when the headline multiple is being discussed.

Then there is tax, which comes out of the $28.6M and depends on entity type, stock versus asset structure, and your basis. Run your own EBITDA and a realistic multiple through the business valuation calculator before you let anyone anchor you to a number.

The four terms that decide what you keep

• Rollover equity. The portion of the price you reinvest rather than receive. It is sold as alignment and as a "second bite," and sometimes it is exactly that - but it is a minority position in a leveraged company, on the fund's timetable, subject to the fund's exit decision. What actually happens to rollover equity is worth reading before you agree to the percentage.
• The working capital peg. A target level of working capital you must deliver at close, with a dollar-for-dollar true-up either way. How the target is calculated - which months, which accounts, how seasonality is handled - is negotiable, and it is usually negotiated after exclusivity has started.
• Escrow and indemnification. Money held back against breaches of your representations. Representation and warranty insurance has shrunk indemnity escrows considerably, but the separate escrow for the price adjustment remains standard.
• Earnouts. If a valuation gap has to be bridged, part of the price becomes contingent. Treat that portion as an option, not as money. Across deals with earnouts outside life sciences, they pay roughly 21 cents on the dollar, and 68% of earnout deals carry multiple performance metrics (SRS Acquiom).

What changes the day after close

The company now carries the debt that bought it, and the governance changes even when the fund takes less than all of it. Board composition, budget approval, hiring above a threshold, add-on acquisitions, refinancing and the timing of the next sale typically move to a consent list. This is true of minority investments too - a minority stake routinely comes with vetoes that decide the things owners care most about. If the objective was partial liquidity rather than a full exit, a minority recapitalization deserves a look on its own terms rather than as a consolation prize.

Should you sell to private equity at all?

Sometimes, yes. A sponsor is the right buyer when you want a large single liquidity event, you have a management team ready to run the business, you are genuinely interested in a second equity outcome, and you can live with somebody else controlling the timing of it. The competitive dynamics right now are real and the price can be excellent.

It is the wrong buyer when what you actually want is cash out plus continuity - your team in charge, no outside consent list, no clock. That combination is what an Independent Buyout is built for: the financing is sized the way a sponsor would size an LBO, but the buyer is a trust owned by your own employees, so no fund lands on the cap table. The side-by-side arithmetic against a sponsor deal shows where each one wins, and the full list of alternatives to a private equity sale covers the routes in between.

Whatever you decide, decide it before the LOI. The advisor you pick shapes which buyers you even meet, so how to choose an M&A advisor is a first-week question, not a last-week one.

Frequently asked questions

How long does it take to sell a business to private equity? Six to nine months for a typical middle-market process, broken into 6-12 weeks of preparation, 8-14 weeks of marketing, 2-4 weeks to negotiate the LOI, and 8-12 weeks of exclusivity and closing.

What EBITDA do I need for private equity to be interested? Most lower-middle-market sponsors start looking at around $3 million of EBITDA, because that is roughly where a business generates enough cash flow to service acquisition debt. Below that, the buyer universe shifts toward individual buyers and strategics.

What multiple will private equity pay? Size drives it more than sector. Sponsored deals in the $10M-$25M enterprise value band averaged 6.4x and the $25M-$50M band 6.8x year to date through Q3 2025, with multiples climbing steadily as enterprise value rises.

Do I have to roll over equity? In practice, usually yes - sponsors want the seller invested in the outcome. The percentage is negotiable, and it belongs in the LOI rather than in the purchase agreement three months later.

What is the biggest mistake sellers make? Signing an LOI on price alone. Exclusivity is the one binding term in the document, and every unresolved mechanism - the peg, the escrow, the rollover percentage, the earnout metric - gets settled after your leverage is gone.

Sources

• PCE Investment Bankers - "M&A Process Stages Timeline: What Business Owners Should Expect"
• Bain & Company - Global Private Equity Report 2026 (press release)
• Capital Pad - "Lower Middle Market EBITDA Multiples" (citing the GF Data ESOP Advisor Special Report, Q3 2025)
• SRS Acquiom - "M&A Deals: Key Trends from the Deal Terms Study"

The bottom line

A private equity sale is a well-worn, professional process, and there is nothing wrong with running one. Just price it honestly: headline enterprise value, minus the true-up, minus fees, minus the rollover, minus the escrow, minus tax - and then ask whether the part you keep, plus a minority position on someone else's clock, is the outcome you actually wanted. On the hypothetical above, 70% of the headline reached the wire and a quarter of the price stayed in the company.

If your company is doing $3M+ in EBITDA and you want to compare a sponsor process against a structure that pays you like one without putting a fund on your cap table, talk to IBO Advisors about your specific situation.