What private equity firms look for in platform acquisitions

Here is the formula for an attractive purchase candidate as a platform, and not all of these are absolute:

1. A strong management team that will remain in place and be incentivized after the purchase.
2. No reliance on a few customers. Any customer accounting for over 10% of sales can pose a risk. (This is not always a deal-killer, but it makes it more difficult to get higher multiples).
3. Reliance on a few vendors that supply goods can also be critical.
4. Organic and sustainable growth of revenues for four or more years.
5. Strong intellectual property protection and strong brand recognition.
6. EBITDA of more than $4 million and an EBITDA margin of 10% of sales or better. Some groups require over $10 million or more of EBITDA for platforms. Some groups look for smaller.
7. A low CAPEX threshold. The buyer doesn’t have to purchase a large amount of new equipment or assets to grow the business after the sale, and the annual requirement is not substantial.
8. High accounts receivable and inventory turnover. This facilitates the conversion of profits to cash flow more quickly.
9. The seller will reinvest some of the proceeds from the sale back into the company. I have seen a 20% reinvest yield, which equals the original purchase price after the PE group sells years later.
10. Audited financial statements on a GAAP basis are helpful, and so is a quality of earnings report.

Positioning your business

A list of add-on acquisitions that the seller can share with the buyer, because their goal is to expand through acquisition and get economies of scale. Contact me, Len Friedman, if you have any questions or are ready to sell your business.

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1. Relying on outdated or incomplete financials

One of the most significant mistakes in business valuation is using outdated or inaccurate financial data. Buyers want to see accurate and recent financial statements. If your books are messy, your business looks risky. Clean up your records to ensure they accurately reflect current operations. This shows you’re organized and prepared—not just for a valuation, but for success.

2. Ignoring market conditions and industry trends

Valuation isn’t done in a vacuum. Your industry’s outlook, market position, and competition all matter. If you don’t account for trends, you could end up overpricing or undervaluing your business. Do your research or work with a professional who understands your field and how the economy affects your company’s worth.

3. Depth of management

Depending on who the buyer is and your workforce in place, especially in terms of non-owner management depth, the situation after a sale is critical. This needs to be conveyed to a potential buyer

4. Using the wrong business valuation method

There’s no one-size-fits-all method. Income-based, asset-based, and market-based methods all serve different purposes. Using the incorrect one could result in an unrealistic value or confuse your stakeholders. This is where a professional business valuation can make a big difference in both accuracy and presentation.

5. Not adjusting for one-time or personal expenses or income

Failing to normalize earnings by removing non-recurring items is a classic mistake. This leads to misleading EBITDA figures and false expectations. Adjust for events that won’t recur after the sale—like pandemic relief funds or lawsuit settlements—so the numbers reflect the company’s actual performance.

6. Trying to DIY the business valuation

Online calculators and gut instincts won’t cut it. Your business is too important to undervalue. A proper valuation requires financial experience and industry insight. Work with an expert to get an accurate picture—and, more importantly, a strategy for moving forward.

Lastly, the seller should not show the valuation to the buyer. It is the equivalent of showing your hand in a poker game, which usually results in not winning as much as you could. The seller doesn’t know what you will be offered, especially from a private equity or strategic buyer.

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What is adjusted EBITDA and why it matters

Why remove one-time and unusual income or expense items? Because they distort the picture of how your business performs on a regular basis. Common examples include personal car leases, one-time legal expenses, or non-working relatives on payroll. If you’re valuing your company based on inflated earnings, you’re setting yourself up for a tough negotiation—maybe even a failed deal. Clean financials and a transparent breakdown of these adjustments make your business more attractive to serious buyers.

How to identify adjustments before the deal

Begin by reviewing your general ledger and tax returns. Look for any items that don’t directly support operations, like your Porsche, your cousin’s salary, or annual conference trips that are more vacation than business. Once you’ve flagged those, work with a valuation expert to quantify and document them. This process isn’t just helpful for selling. It can also give you better control over your financials, uncovering ways to boost efficiency and real profitability. Adjusted EBITDA is more than a number—it’s a reality check that makes you look good on paper and in person.

To dig in further, you may want to consider a quality of earnings (QofE) report. Contact me, Len Friedman, if you have any questions or are ready to sell your business.

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Not just about the numbers on the surface

While financial statements tell part of the story, a quality earnings report goes deeper. It looks at cash flow, revenue sources, margins, customer concentration, and unusual expenses. The goal is to present a clear, accurate picture of ongoing profitability. It helps buyers avoid surprises, sellers defend their asking price, and reps and warranty liabilities are avoided.

Supporting addbacks to EBITDA and reducing risk

The most crucial metric when selling control of a middle-market private company is the earnings before interest, taxes, depreciation, and amortization (EBITDA). This metric is used to apply a multiple to conclude an asking price. Most seller representative reports start with EBITDA per books and then add items such as:

• Officers Comp
• Officers Perks (Perquisites)
• Personal non-operating expenses, such as travel, meals, vacations, and other costs that are unnecessary for operations
• Non-recurring items

This report often comes up during due diligence. For buyers, it lowers risk and supports financing efforts. For sellers, it shows transparency and builds trust. It also helps resolve questions before they become deal-breakers. When both sides have clarity, negotiations go more smoothly.

Who prepares the quality of earnings report

A quality of earnings report should be prepared by an independent third party, usually a CPA firm with M&A experience. Generally, why not the existing accountants for the seller? It’s different from an audit or a simple financial review. Think of it as a deep dive into what drives the business’s economic health.

Contact me, Len Friedman, if you have any questions or are ready to sell your business today.

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