A guide to Risk Managment For Sellers

What business owners actually need to know before entering the conversation

By Jared Lewin

 

Depending on the room you’re in, mentioning private equity can trigger some serious side-eyes.
People always seem to have a story.

“My brother’s father-in-law sold to private equity. They screwed him.”

“Those guys are cheapskates. They’re just looking to strip out everything we worked hard
to build.”

“My son works in private equity and we never see him.”

All valid. All common, unfortunately. And all missing a lot of context.
So let’s add some context.

 

 

What Is Private Equity, Really?

 

Let’s start with the basics. Equity is ownership in a business. Private means the business is
owned by an individual or a group of individuals, not traded on a public stock exchange.

Public equities are what most people call stocks, the kind you buy on the stock market. There
are roughly 10,000 publicly traded businesses on U.S. exchanges. By contrast, there are
approximately 25 million private businesses in the United States.

Private equity owns a small slice of that private world. And within that slice, there’s an enormous
range of deal types, firm strategies, and outcomes, which is exactly why blanket statements
about PE tend to mislead more than they inform.

 

 

What a Capital Partner Actually Brings

 

Done right, a private equity partner brings more than a check. The main benefits for a private
business include:

1. Capital: the obvious one, but the structure and timing matter just as much as the amount
2. Operational expertise: investors who have scaled dozens of businesses in your sector
   (and others) bring a playbook most owners never had access to
3. Network and connections: introductions to customers, suppliers, lenders, and talent
   that accelerate what would otherwise take years
4. Back-office infrastructure: legal, HR, finance, payroll, insurance, and compliance
   support that frees your team to focus on growth

Of course, most of us have also heard the other side. Toys “R” Us. Caesars Entertainment.
Companies that were saddled with debt, stripped of investment, and ultimately pushed into
bankruptcy. Those stories are real, and they’re worth understanding. But they’re not the whole
story.

 

 

First, Understand the Market You’re In

 

Not all private equity firms are fishing in the same pond. The market is generally segmented by
deal size, measured by Enterprise Value (EV) – essentially the price tag on a transaction.

Market Segment	Enterprise Value	Typical Buyer Profile
Lower Middle Market	Under $100M	Growth-focused PE, family offices, fundless sponsors
Middle Market	$100M to $500M	Established PE funds, strategic acquirers
Upper Market	$500M+	Large buyout firms, public company M&A

Quick Rule of Thumb

A rough estimate of your Enterprise Value: take your annual profits and multiply by 5 to 10.
While we have closed a handful deals reaching 17x or even 20x EBITDA, these represent
unique market outliers. For a more precise picture, schedule a call with our team. It’s one of
the many things we are happy to contextualize and discuss together.

If you’re in the lower middle market (which covers a sizable amount of the closely-held
businesses we work with), a private equity investor is almost certainly thinking about growth, not
cost-cutting. A company doing $5 million in profit has far more to gain from better marketing, a
stronger sales team, or an improved product than it does from squeezing expenses.

Cutting costs helps margins. Driving growth builds businesses. Investors in this segment
know the difference.

 

 

The Three Stages of Investment

 

Broadly speaking, private equity investment follows the business lifecycle. Where your company
sits on that spectrum determines who’s going to be interested and what they’re going to expect.

 

1. Early Stage: Angel Investors & Venture Capital

Early-stage investment targets companies that are pre-revenue or just getting traction (Think
Peter Thiel writing the first check to Facebook). The risk is high, the potential upside is
enormous, and investors typically take a minority stake while founders retain control. This is the
world of venture capital, and it’s largely a different game than what most business owners
encounter.

 

2. Growth Stage: Growth Equity

This is where most of our clients live, and it’s the most misunderstood category.

Growth-stage businesses have cracked the code. They’re generating significant revenue and
are scaling in size and scope. They might not be maximally profitable yet because they’re
reinvesting every dollar back into expansion, but the model is proven. Growth equity investors
come in to pour gasoline on a working engine: entering new markets, acquiring smaller
competitors, building out sales teams, or funding technology that would otherwise take years to
afford from cash flow alone.

What makes this stage compelling for owners is that you can often take some chips off the table
(real personal liquidity) without a full exit. You can stay involved, retain meaningful equity, and
participate in the upside of the next phase of growth.

And here’s something most owners don’t realize: even if your business is 30+ years old, you
may still be in a growth stage. It’s not about age. It’s about your size, trajectory, and what the
last few years have looked like.

 

3. Mature Stage: Buyouts & Beyond

Mature-stage investment covers established, cash-flow-positive businesses. PE buyout firms
often using leverage (debt placed on the company itself), and generate returns through
operational improvement, acquisitions, and an eventual resale.

This is where the horror stories tend to originate. And they’re not unfounded. Leverage amplifies
returns in the best case and creates real financial stress in the worst. The key is understanding
what you’re signing, who you’re signing with, and whether their plan for your business aligns
with why you built it.

This category also includes IPOs and turnaround situations, but for most owners in our market,
the relevant version is a buyout, either as a stand-alone platform or as an acquisition by an
existing PE-backed company looking to expand.

 

 

Platform vs. Add-On: What That Means for You

 

When a PE firm evaluates a business in our market, they’re typically approaching it in one of
two ways:

• Platform acquisition: your business becomes the anchor for a broader acquisition
  strategy. The PE firm builds around you, bringing in complementary companies over
  time. You’re the foundation.
• Add-on acquisition: your business joins an existing PE-backed platform in your sector.
  You accelerate something already in motion and benefit from the resources of a larger
  enterprise.

In both cases, the overwhelming goal is continued growth, not extraction. The best investors in
this space win when your business wins. That’s the alignment that matters.

 

 

A Word From Us

 

At the Exit Group, we’ve been building relationships with business owners and investors since
2013, oftentimes long before any conversation about a transaction begins. We work on behalf of
the acquirer, which means we come to you with real buyers, real mandates, and real deals
already in motion.

We understand your business is only what it is because of your people, your culture, and the
decisions you’ve made over years. We choose our clients accordingly, and we take the match
between owner and investor seriously.

Private equity isn’t right for everyone. But for the right owner, at the right stage, with the right
partner, it’s one of the most powerful tools available for building lasting value and for finally
getting paid what your business is worth.

 

 

Curious where your business fits?

Reach out to the Exit Group team for a confidential conversation at exitgroup.com