How Private Equity Views Small Business Deals

Private equity (PE) firms have been increasingly active in the small business space, seeking profitable, scalable companies that fit their investment strategies. But not every business is a good match.

Understanding the private equity criteria for acquisitions can help both buyers and sellers position themselves for success. For sellers, it means knowing what PE firms value most. For buyers working with PE partners, it means targeting businesses that align with their deal thesis.

At Merge, we work with private equity groups across industries, and we’ve seen the patterns of what makes an acquisition appealing. Here’s what matters most.

1. Strong, Consistent Financial Performance

Financial stability is the foundation of any acquisition. PE firms typically look for:

  • Steady revenue growth over multiple years.

  • Healthy EBITDA margins that meet or exceed industry averages.

  • Clean financial statements with transparent reporting.

  • Predictable cash flow that supports debt service.

💡 Businesses with consistent profitability are more likely to secure favorable valuations from PE buyers.

2. Recurring or Predictable Revenue

One of the most attractive private equity criteria for acquisitions is revenue predictability. PE firms value:

  • Subscription or retainer-based models.

  • Long-term customer contracts.

  • High customer retention rates.

Recurring revenue reduces risk and supports long-term growth plans.

3. Scalable Operations

PE buyers are focused on growth, so scalability is key. They prefer businesses that can expand without a proportional increase in costs. Examples include:

  • Proven systems and processes.

  • Technology that supports automation.

  • Capacity to increase production or service volume.

4. Strong Management Team

Many PE firms want the existing leadership team to stay post-acquisition. This ensures:

  • Continuity of operations.

  • Retention of institutional knowledge.

  • A smoother integration process.

If the owner is heavily involved in daily operations, PE firms will want a transition plan that puts leadership in place.

5. Competitive Market Position

A strong position in the market makes a business more resilient. PE firms look for:

  • Unique value propositions or proprietary advantages.

  • Brand recognition and loyalty.

  • Defensible market share against competitors.

6. Industry Growth Potential

The best acquisitions are in industries with room to grow. PE buyers research:

  • Market size and projected growth rates.

  • Barriers to entry for competitors.

  • Opportunities for consolidation within the sector.

7. Multiple Growth Levers

Private equity investors want clear pathways to increase value, such as:

  • Geographic expansion.

  • Product or service line extensions.

  • Strategic partnerships.

  • Pricing optimization.

8. Operational Efficiency and Cost Structure

Efficient businesses are easier to scale and more profitable. PE firms assess:

  • Cost management practices.

  • Supply chain stability.

  • Productivity metrics and benchmarks.

9. Low Customer Concentration Risk

If one client represents a large portion of revenue, the risk increases. PE firms prefer:

  • A diverse customer base.

  • No single client making up more than 10–20% of revenue.

  • Broad industry coverage to reduce volatility.

10. Cultural and Strategic Fit

Beyond the numbers, private equity criteria for acquisitions include alignment with the firm’s investment thesis and culture. This might mean:

  • Businesses that fit well with existing portfolio companies.

  • Shared values and vision between the management team and investors.

11. Clean Legal and Compliance History

PE buyers want to avoid surprises. Due diligence includes:

  • Verifying licenses and certifications.

  • Reviewing legal history for disputes or liabilities.

  • Ensuring compliance with regulations.

The Merge Advantage in Private Equity Transactions

At Merge, we help match private equity firms with businesses that meet their criteria, and we guide sellers in presenting their company to attract premium offers. Our role includes:

  • Pre-screening businesses for PE-friendly attributes.

  • Supporting due diligence with accurate, organized documentation.

  • Facilitating negotiations that align with strategic goals.

Final Thoughts

The private equity criteria for acquisitions revolve around strong financials, scalability, leadership, and market opportunity. Whether you’re a seller preparing for a PE exit or a buyer evaluating targets, understanding these factors will help you focus on the right opportunities.

If you’re ready to explore private equity-backed acquisitions, connect with Merge and we’ll help you align with the right partners.