When business owners start mapping out who might buy their company, private equity firms almost always end up on the list. They are professionals at the process, they have the money available, they know how to structure the financing, and they can often pay a better multiple than a strategic buyer — counterintuitive as that may sound.
What many business owners don't know is that the way a fund evaluates a company has almost nothing to do with how a strategic buyer does it. A fund doesn't buy companies: it buys value creation plans. And everything it looks at when studying a deal comes down to one question: can I turn this capital into 2x or 3x within the fund's horizon, at a reasonable risk?
Understanding that mental model — and structuring your company to fit it — is what separates a process that closes at a fair price from one that falls apart in the first meeting.
To complement what follows, on the Rainmaker podcast we talked with Francisco López, founder of Lift Asset Management, an independent asset manager that has grown from less than €4 million to more than €500 million under management by selecting only private equity funds that generate consistent returns — not just profits on paper.
The conversation covers the other side of the coin: how funds are evaluated from the top, what sets an excellent manager apart, and why process discipline is the key to long-term returns.
Fund math: 2x in 5 years, 3x in 8 years
Private equity funds are conservative investors. Unlike a venture capital fund, which makes 30 or 40 investments per fund on the assumption that most won't return the capital and two or three will be the big winners, a PE fund makes 6 or 7 investments per fund. It can't afford for almost any of them to fail.
This forces them to set a very high bar before committing capital. The number they have in mind — it's not an official figure, it's how they reason — is usually around a 15%–20% annual return. In practical terms, this translates into:
- 2x the invested capital in 5 years, or
- 3x the invested capital in 8 years
A return below those numbers isn't necessarily a disaster, but it means the investment doesn't fit the fund's logic. If their numbers don't show they can return at least those figures, they discard the opportunity very quickly.
The three levers they use to generate returns
When a fund evaluates a company, it's working backward. It has a return target and needs to see how to combine three levers to get there:
Almost no deal relies on a single lever. The real question isn't which one to use, but how to combine all three in a specific company. And the answer to that question determines whether the fund opens the data room with you or politely closes it. We've published a dedicated analysis on how EBITDA multiples are built and what moves them by industry.
The size floor: why many SMEs aren't on the radar
There's something important to understand before getting into the detailed analysis: a fund needs to deploy capital consistent with its own size.
A €150 million fund can't fill its investment thesis with €5 million checks. It would need to do 30 deals to deploy the entire fund, which is operationally unfeasible — no team can manage 30 portfolio companies with the attention each one requires. A €150M fund will want to deploy around €20M of capital per deal. A €1,000M fund, at least €100M per investment. And the big ones (CVC, Blackstone, Apollo) handle deal sizes of hundreds of millions each.
The practical consequence: it's very rare for a PE fund to acquire a company with EBITDA below €5 million. Not because the company is bad — it may be excellent — but because the deal size doesn't fit their capital deployment logic. This is one of the least understood realities of the Spanish lower mid-market.
If your company is below that floor, there are two viable paths:
- Be the initial platform of a buy-and-build strategy, where a fund comes in with you and then adds smaller companies around you to build scale
- Be the add-on, that is, one of the companies that joins an existing platform, usually sold at a lower multiple than the platform
For which type of fund fits each profile — buyout, growth equity, turnaround — see differences between buyout, turnaround, and growth equity funds. And for the mechanics of the leverage we mentioned in the first lever, see what an LBO is.
What business owners can do to better fit this logic
Knowing how a fund evaluates a company gives you a concrete roadmap for preparing your business before starting a process. The most direct levers:
- Document an explicit growth plan: which expansions, which products, which geographies. The more structured your "what I would do with this company if I had €20 million in capital," the easier it is for the fund to build its thesis on top of it.
- Improve EBITDA-to-free-cash-flow conversion: adjust capex, optimize working capital, reduce recurring reinvestment needs. The debt the fund can put into the deal depends more on free cash flow than on EBITDA itself.
- Reduce customer concentration: revenue where two customers account for 40% scares any bank that has to finance the LBO.
- Identify the natural buyer five years out: the clearer you are about who could buy the company from the fund at exit (a strategic buyer, a larger fund, an IPO), the more likely your company is to fit the thesis.
- Work on founder dependency: a company that doesn't work without the owner after the transition loses multiple. We cover it in founder dependency.
- Identify buy-and-build opportunities in your industry: if you can map five or ten small competitors that could be acquired and describe how they would be integrated, your pitch as a platform is much stronger.
None of these levers requires changing the business. What changes is how it's presented and the discipline with which it's documented. And in a conversation with a fund, that makes the difference between whether they pick up the phone for a second meeting or not.
