Canonical definition
What is private equity in small business?
Private equity in small business typically targets EBITDA above $1M, control or majority equity, and a three-to-seven year hold. The fit varies by firm more than by stated criteria. A small business owner reading a PE offer is reading the firm, not the asset class.
In one sentence
Control or majority capital with a fixed hold period and an exit thesis.
What it actually does
Private equity for small business operates across five mechanics:
- Acquisition structure. PE typically buys majority or control. Minority growth equity exists but is a different shape with different consequences.
- Hold period. Three to seven years is the standard. The firm has a fund-cycle deadline that shapes everything.
- Operating thesis. PE buys with a thesis: roll-up, professionalization, geographic expansion, multiple-arbitrage. The thesis dictates what happens after the close.
- Capital structure. PE typically introduces debt at close. The company's cash flow services the debt. This changes operating decisions immediately.
- Exit strategy. Sale to a strategic, sale to another PE firm, recapitalisation, or IPO. The exit shape is decided years before the exit happens.
What it is not
- Not the same as venture capital. VC funds growth in unproven businesses. PE buys profitable businesses with predictable cash flow. Different stage, different math.
- Not the same as a strategic acquirer. A strategic buys for synergy. PE buys for return. The owner experiences these very differently in the year after the close.
- Not a single asset class. Lower-middle-market PE is different from middle-market PE, which is different from mega-fund PE. The buyer's check size shapes the buyer's behaviour.
- Not always a control transaction. Growth equity is a minority shape; some PE firms write minority cheques. Read the term sheet, not the firm's marketing.
- Not the same as taking chips off the table. A founder secondary inside a PE round is one mechanic; a full sale is another. Buyers often blend the two.
Three short examples
Example 1
The roll-up thesis the owner did not read.
A construction-services owner sold control to a PE firm. Six months later, the PE bought three more companies in the same vertical at lower multiples. The owner learned during the integration that the original purchase was the platform, and the platform's role was to absorb downward-priced add-ons.
Example 2
The debt service that changed every decision.
A professional services owner sold control. The PE introduced $20M of debt at close. Six months later every operating decision (hiring, capex, marketing spend) had to model debt service. Decisions that had been straightforward became encumbered.
Example 3
The rollover equity that became dilution.
An owner rolled twenty percent of equity into the new structure as alignment. Two recapitalisations later, the rollover was diluted to four percent. The 'alignment' had not been modelled for the firm's fund cycle.
When to use it
PE may be the right buyer when:
- EBITDA is above $1M and stable.
- The owner is willing to stay through a three-year transition.
- The thesis (roll-up, professionalization, expansion) matches what you would do anyway.
- The owner accepts debt-service-driven operating decisions.
- The exit shape (sale, recap, IPO) is acceptable.
PE is the wrong buyer when:
- The owner wants to exit cleanly in twelve months.
- Cash flow is too lumpy to service debt predictably.
- The thesis does not match the owner's view of the business.
- The team will not survive the transition.
- The owner cannot accept short-term operational changes for medium-term thesis execution.
Common questions
- How much EBITDA do small-business PE firms target?
- Lower-middle-market PE typically starts at $1M EBITDA. Middle-market PE targets $5M to $25M. Mega-funds target $50M+. The firm's check size dictates the lower bound.
- Does PE always buy control?
- Most PE buys control or majority. Minority growth equity exists but is a different shape. Read the term sheet, not the press release.
- How long does PE hold a small business?
- Three to seven years is standard. Some funds hold longer (continuation funds). The fund-cycle deadline shapes every operating decision.
- What happens to the owner after a PE sale?
- Depends on the deal structure. Most PE deals require the owner to stay through a transition (one to three years). Some require longer. The earnout structure prices the owner's continued involvement.
- Who advises owners on PE offers?
- Stan Tscherenkow's private advisory reads the offer, the firm, and the post-close structure as part of a Tier 01 single engagement or Tier 02 monthly read during a longer negotiation.