What makes an attractive private equity investment?
1. A+ management team
Most private equity firms will do a full background check on key executives before making an investment. By getting to know the management to evaluate their strengths and weaknesses. Strong management teams have proven executives, strong leaders, and industry experts.

2. Strong market position
Private equity firms prefer to invest in market leaders, who are best positioned to lead the market and win new business. Companies should have strong products with meaningful value propositions that compete effectively with other industry players.

3. Track record of growth
Most private equity firms (turnaround firms excluded) want to see a history of growth. As a general guideline, established (non-startup) companies growing north of 25% are strong growers.

4. Multi-pronged growth strategy
Companies that have the opportunity to become much larger companies get private equity firms excited. The prongs of a growth strategy are: 1) More sales of existing products to target customers, 2) Selling existing products into new customer segments or geographical regions, 3) Launching new products to the market and 4) Acquiring other businesses that achieve either one of the above or open up a new transformative opportunity.

5. Attractive customer dynamics
They want to see low customer concentration among your top customers (limits the risk associated with losing a customer), increased same-customer revenue, and low customer attrition. Well-known customer names are a bonus and point of credibility, but not the end all be all.

6. Predictable revenue
Companies with multi-year contracts, repeatable sales cycles, and recurring subscription revenue tend to be most attractive to private equity firms.

7. Ample free cash flow
Debt is often a component of a private equity transaction and paid with cash flows from the company. Since this debt is senior to a private equity firm’s investment, we seek to avoid companies with limited cash flow as they won’t be able to pay down debt, interest payments or cover operational costs.

8. Limited operational risk
Companies with high concentrations in suppliers or channel partners, with no available substitutions, are riskier. Companies without internal processes to manage sales, marketing, customer service, IT, etc., are also riskier.

9. Favorable industry trends
Private equity firms prefer to invest in industries that will exist for years to come, vs. industries that could become obsolete with new technological innovation.

10. Reasonable valuation expectations
Private equity firms invest other individuals’ capital, who expects a certain return. If we pay a high valuation for a company, we will have to get an even higher exit price to satisfy investors. Regardless of how great a business may be, if we don’t have a path to hitting our return threshold, we won’t be able to do the deal.

11. Multiple exit/return opportunities
Private equity makes most of its money when we exit companies. They will evaluate the logical buyer universe before investing. An ideal scenario is a wide landscape of potential strategic acquirers as well as other private equity firms.

While the above points are the elements most private equity firms look for in a business, there is no company that meets every criterion. However, if you understand how a private equity firm evaluates your business, you can better position your company for a more favorable private equity process.