Private Equity Paint by Numbers
Hey there entrepreneurs,
Welcome to the Better Business Brief, where I share takeaways from:
- running a business I’m building to sell for millions
- my consulting with business owners building to sell for millions
- tips and tricks you can use to do the same
Welcome to 2025! The last few months, I’ve started working on private equity deals. I get questions about how it works all the time. Usually, people want to know how do they make money and why would someone sell their company to do one of these deals if it’s doing well and growing.
So today, in less than 5 minutes, I’ll give you:
📃 An example of a deal by numbers
💰 How the money is made
📈 How business owners benefit
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Ok, let me paint the picture with numbers. Imagine this:
You’ve got a business doing about $6M/ year in sales and $2.5M/ year in profit. The business gets valued at $12.5M (or a 5X multiple on net profit). You sell 80% of it for $10M to a private equity firm and keep 20% equity, staying on to help advise. But why would you keep that equity and stay on?
The private equity firm buying your 80% is going to do something like this:
- Go out and buy a majority ownership of 3-5 other companies like yours near you, each doing $1M+ in net profit/ year. Let’s say 4 each doing $1.5M for our example.
- Hire a CEO with proven industry experience and mergers and acquisitions experience to integrate all 5 companies together under common leadership and technology and systems
- Grow all of them together for 2 - 7 years through cross-selling and better marketing/ operations/sales/financial management practices (Let’s assume just 10% growth each year altogether over 3 years for our example)
- Eventually sell the package of all 5 companies to a bigger buyer (probably either another PE firm or a strategic company looking to grow) and make a MASSIVE profit.
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Now obviously, this sounds great for them, but how does that actually play out and what's in it for the person selling their business?
They look like this:
In our example, it was…
- One $2.5M/year in profit company
- Four others each doing $1.5M in profit (or $6M in profit together)
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So, that's $8.5M in profit altogether. If they grow the 10% per year over 3 years, then at the end of the 3 years, the whole package of companies together would be doing about $11.3M in profit per year.
Remember, as the owner of the first business, you held onto 20% equity. Your company was 29% of the whole combined package of companies.
20% of the 29% is about 5.8% that you have of the whole thing now. But here's where things get crazy:
When the PE firm sells this $11.3M/year profit machine of a company, it's not worth just a 5x multiple on profit anymore.
The game has changed because you’re dealing with bigger, more well funded and motivated buyers.
Now it's worth probably more like a 10x - 12x multiple or more. Let's assume it sells for an 11x for our example..
So that looks like this: $11.3M x 11 = $124.3M final sale price.
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Remember, you as the original business owner still have 5.8% of that package. So you’d get a $7.2M payout from this sale because of that equity you kept.
So not only did you get a $10M check and get to take a step back from running the company the first time around, you get another $7.2M for a total of $17.2M. This is called getting a “second bite of the apple.”
Now even though we assumed 10% growth per year, a lot of times there's more than 10% growth per year with these strategies. These PE firms have been running these plays for decades, and so have the CEOs they hire, and they know how to get results.
These are the kinds of deals I’m working on right now and looking to do more of in 2025. They’re big and exciting, and I’ve found they align with my mission of helping business owners maximize their exits from their businesses.
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If you own a business that you think is positioned for something like this, let's talk. Whether you want to do it now, or sometime in the future, the worst that can happen is I answer some of the questions you have and you have a better idea of whether it's for you. Start the conversation here.
Happy value-building to you!
See you next time for Better Business Brief,
-Brody
