What PE Firms Look at Before They Even Take Your Call
Private equity firms evaluate hundreds of potential investments. Most get screened out in minutes—before the first real conversation. Here's what PE firms look at first to decide if you're worth their time, and how to position your business to pass that initial screen.
Key Takeaways
- •PE firms look at size, growth, and margins first—everything else comes later
- •EBITDA is the primary size filter; most PE firms have minimum thresholds
- •Customer concentration and owner dependence are early deal-breakers
- •Understanding these criteria helps you prepare years before you want to sell
A typical middle-market PE firm reviews 200+ potential investments annually and invests in maybe 2-3. The first filter is brutal—a quick scan of headline metrics to determine if the opportunity is even worth exploring. Most deals die here, never making it to the first meeting.
Understanding what PE looks for in those first five minutes helps you prepare your business years in advance. You can't fake these metrics at the last minute, but you can build toward them intentionally.
1. Size
EBITDA threshold
2. Growth
Revenue trajectory
3. Margins
Profitability profile
The Three Initial Screens
1. Size (EBITDA)
EBITDA is the primary size filter. PE firms have minimum thresholds based on their fund size and investment strategy:
| PE Firm Type | Typical EBITDA Minimum | Revenue Equivalent |
|---|---|---|
| Lower middle market | $2-5M | $10-30M |
| Core middle market | $5-15M | $30-100M |
| Upper middle market | $15-50M | $100-300M |
| Large cap | $50M+ | $300M+ |
Below the minimum, the deal isn't worth the PE firm's time—the fixed costs of due diligence and management are similar regardless of deal size. If you're at $1M EBITDA, most institutional PE firms won't engage.
2. Growth Rate
PE firms want growth—they're buying future cash flows, not just current ones. The higher the growth rate, the more attractive the business:
| Revenue Growth | PE Perception |
|---|---|
| Negative | Turnaround or pass |
| 0-5% | Needs a story (pricing power, expansion) |
| 5-10% | Acceptable, not exciting |
| 10-20% | Attractive |
| 20%+ | Very attractive |
A flat or declining business can still get PE interest, but the story needs to be compelling—clear turnaround plan, secular tailwinds, pricing opportunity. Growing businesses get the benefit of the doubt.
3. Margin Profile
EBITDA margin indicates pricing power, operational efficiency, and competitive position. PE expectations vary by industry, but general rules apply:
- Below 10% EBITDA margin: Needs a clear improvement path
- 10-15%: Acceptable, especially for lower-margin industries
- 15-20%: Good, indicates pricing power or efficiency
- 20%+: Excellent, commands premium valuation
The Margin Expansion Story
PE firms love a margin expansion opportunity. If you're at 12% margin with a clear path to 18%, that's often more attractive than a business already at 18% with no room to improve. The ability to create value matters more than current state.
The Quick Disqualifiers
Beyond the three headline metrics, certain characteristics can kill interest immediately:
Customer Concentration
A single customer representing 20%+ of revenue is a red flag. Above 40%, most PE firms won't engage—the risk of customer loss is too high. The question becomes: "Are we buying a business or buying a customer relationship?"
Owner Dependence
If the owner IS the business—holding all the customer relationships, making all the decisions, possessing all the knowledge—there's nothing to buy. PE firms want a business that runs without the founder, or at least can transition quickly.
Industry Concerns
Some industries are out of favor—either due to secular decline, regulatory risk, or past bad experiences. Industries facing disruption, heavy regulation, or commodity dynamics are harder to sell to PE.
Messy Financials
If financial data is incomplete, inconsistent, or obviously unreliable, PE firms assume the worst. Clean books are table stakes—messy financials suggest either operational weakness or something to hide.
What Gets You Past the Screen
The initial screen is pass/fail. To get to a real conversation, you need:
- EBITDA at or above the firm's threshold (or a clear path to it)
- Consistent revenue growth (ideally 10%+ but at least positive trend)
- Healthy margins for your industry (or margin expansion opportunity)
- Reasonable customer diversification (no single customer above 15-20%)
- Management team beyond the founder (or clear succession plan)
- Clean, auditable financials (or at least professionally prepared)
Notice these aren't things you can create overnight. Building toward PE-readiness takes years of intentional effort—growing profitably, diversifying customers, building management depth, and maintaining clean books.
Preparing Years in Advance
3-5 Years Before Potential Exit
- Build management team that can run the business without you
- Implement proper financial systems and controls
- Start customer diversification strategy
- Document processes and institutional knowledge
2-3 Years Out
- Ensure consistent growth trajectory (avoid down years)
- Clean up any financial irregularities or unusual items
- Consider quality of earnings preparation
- Develop the "story" of growth potential and value creation
1-2 Years Out
- Engage transaction advisors (investment banker, M&A attorney)
- Prepare management presentations and data room
- Address any obvious weaknesses before they're discovered
- Demonstrate continued performance through the process
The Trend Matters More Than the Point
PE firms look at trends, not just current numbers. A business at $3M EBITDA growing 20% annually is often more attractive than one at $4M EBITDA that's flat. The trajectory tells them where you'll be in 3-5 years under their ownership.
Preparing for a PE Transaction?
Eagle Rock CFO helps businesses prepare for institutional investment and M&A transactions. We can assess your PE readiness, identify gaps, and help you build toward the metrics that attract premium valuations.
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