A Business Valuation Is Critical to a Successful PE Transaction

For a business owner, selling the company to a private equity (PE) firm can be one of the most significant financial and strategic events of his or her life. Many sellers focus on their companies' operational aspects, such as growth initiatives, management depth and clean financials. However, valuation readiness is just as critical. Here are ways a business valuation professional can help you prepare.

Establishing a Defensible Value Baseline

Unlike strategic buyers in traditional mergers and acquisitions, PE firms aren't buying operational synergies; they're typically underwriting investment returns. These sophisticated buyers place greater emphasis on normalized earnings, downside risk and exit assumptions.

Obtaining a comprehensive business valuation report from an independent professional helps you understand what drives market value before engaging with PE buyers. Key takeaways from this analysis include evaluating:

• Normalized earnings before interest, taxes, depreciation and amortization,
• Revenue quality, and
• Internal risk factors, such as customer concentration, margin sustainability and reliance on key people.

By establishing a defensible, supportable value range early, you'll enter the market with realistic expectations and fewer surprises.

Valuation professionals can also help separate value drivers from value detractors. Doing this upfront can give owners time to address issues that a buyer could otherwise use as leverage in negotiations.

Stress-Testing Assumptions

While PE firms look at historical performance, what they're buying is future earnings potential. Valuators evaluate management's growth assumptions and translate them into credible cash flow projections that are consistent with market participant assumptions. This includes assessing whether projected growth is supported by historical trends, market dynamics and capital requirements.

The result is a clearer, more credible market-based analysis that resonates with sophisticated PE buyers and holds up under scrutiny. Upfront rigor can facilitate the buyer's due diligence, making the negotiation process faster and more efficient.

Identifying Deal-Critical Issues

Often, transaction challenges surface too late — during financial due diligence or legal review — when the balance of power may have shifted to the buyer. Valuation professionals can identify potential issues in advance, such as:

• Excess (or deficient) working capital,
• Unprofitable or noncore business lines,
• Nonoperating assets and expenses,
• Nonrecurring, related-party and owner-specific expenses,
• Debt-like items that may reduce equity value, such as deferred compensation, management incentive liabilities and shareholder loans,
• Embedded earnouts or contingent obligations, and
• Shares owned by noncontrolling shareholders who may stall or oppose the deal.

By addressing these items proactively, you retain control of the narrative. It also helps minimize surprises and allows you to proactively tackle potential issues before a buyer adjusts its offer price — or walks away from the deal.

Supporting Negotiation and Transaction Structure

In PE transactions, price is only part of the equation. Valuation experts help sellers evaluate deal structures involving rollover equity, earnouts or preferred equity. Understanding how these components affect risk and return enables you to make informed decisions about pricing and long-term wealth outcomes.

A comprehensive valuation serves as an anchor in negotiations. This detailed analysis helps you push back on aggressive buyer assumptions with objective, data-driven support.

Preparing for Life After Closing

In many PE transactions, the seller's interest in valuation-related matters doesn't end at closing. For owners who retain equity or remain involved in the business after closing, a sound valuation foundation provides a clear baseline for future performance and exit planning. It can also reduce the risk of disputes and help protect the seller's return. Relying on an experienced valuation professional creates continuity and reduces friction throughout the transaction's lifecycle.

If you're considering a PE transaction, contact us early in the process. We can help clarify your expectations, strengthen your negotiating position and allow you to enter the market on your terms.