For a long time, private equity was something owners of smaller companies read about. That has changed. Groups that own a company in your trade are now calling businesses with a few million dollars in revenue, and the letter or phone call can be a real opportunity. It is also a different kind of buyer from the individual or the competitor down the road, and it helps to know what it is actually buying before you take the conversation further.
1. What an add-on is
Most of these calls come from a group that already owns a larger company in your industry, usually called the platform. It grows by buying smaller businesses and attaching them to that platform. You would not be selling to a fund that runs your business on its own. You would be joining a bigger company that already has a management team, a back office and plans of its own. That shapes everything about what it values and how it pays.
2. What it pays for, and what it plans to replace
An add-on buyer pays for what it can fold in: your customers, your territory, your trained people, your licenses and certifications, and sometimes a service line the platform does not have yet. It cares much less about the parts of your business it already has. Your accounting setup, your software, sometimes your building and occasionally your company name are things it expects to replace. Picture a service company doing $4 million a year with a strong commercial customer list and an older shop. To an add-on buyer, the customer list and the technicians are the business. The shop may not matter at all.
3. How the deal is usually built
Expect more process than you would get from an individual buyer. Many groups commission a quality of earnings review on your books, ask for monthly financials going back a few years and negotiate a working capital target, which is the amount of receivables and inventory you leave in the business at closing. Part of the price may come as a stake in the platform, called rolled equity, or as an earnout paid later if the business hits agreed results. Neither is unusual, and both can work out well. Both mean that some of your price depends on how the bigger company performs after you sell.
4. What changes for your people and your name
This is the question owners ask me most, and it deserves a straight answer before you sign anything. Add-on buyers generally want the people who serve customers, because that is part of what they are paying for. Office roles can be different, since the platform may already have someone doing bookkeeping, dispatch or purchasing. The sign on the building and the name on the trucks may stay for years or change within months. Ask how the group has handled the companies it already bought, and ask to speak with an owner who sold to it.
5. How to judge one against your other options
An add-on offer can come in stronger than an individual buyer's, because the group can save costs and add your customers to a larger operation. It can also come with more strings: a longer diligence period, more of the price paid later, and a role for you that ends sooner or runs longer than you expected. The fair way to judge it is side by side with what an individual buyer or a competitor would offer, comparing cash at closing, what is paid later and what you are agreeing to do after the sale. A business that only hears from one buyer type rarely learns what it is worth to the others.
The takeaway
A call from a private equity group is a real option for a smaller business, not a long shot. Know that it is usually buying an add-on, know which parts of your company it is really paying for, and compare its offer with the other buyers who would want the same business before you decide.
