How to Sell Your Business to Private Equity

As Chapin Newhard and the team at 48North Partners know, private equity firms typically target companies exhibiting stable, predictable cash flows, often characterized by recurring revenue models such as subscriptions, service agreements, and retainer contracts Street Of Walls Hardly Hustle.

Such revenue streams enable efficient debt servicing and provide downside protection during market downturns Street Of Walls. Additionally, PE investors often avoid businesses requiring significant ongoing capital expenditure—particularly new construction projects—to maximize free cash flow and minimize funding risk cfsg.com.au Quantive.

High customer concentration is another red flag, says Chapin Newhard, with firms typically steering clear of companies where any single client accounts for more than roughly 20–30% of total revenue Allianz Trade Corporate Montage Partners. They preferentially seek service and maintenance providers across residential and commercial markets, where fragmentation and repeat work present attractive consolidation opportunities PE Hub Home.

Recurring Revenue Models

Why Recurring Revenue Matters

According to the team at 48North Partners, PE firms prize stable, predictable income over one-off project fees. Companies with subscription, membership, or service-agreement revenue can forecast cash flows years in advance Hardly Hustle Street Of Walls. Low churn rates and auto-renewal mechanisms further de-risk the investment by locking in customers for defined periods Hardly Hustle.

Common Structures

Subscription/SaaS: Software and digital services with monthly or annual billing cycles Hardly Hustle.
Service Agreements: Contracts for regular maintenance or support (e.g., IT managed services) Street Of Walls.
Retainer Models: Fixed monthly fees for ongoing consulting or professional services Street Of Walls.

Avoidance of New Construction and High CapEx

Capital Intensity and Returns

Businesses requiring large, ongoing capital expenditures (CapEx)—such as new construction or heavy manufacturing—erode free cash flow and dilute returns, making them less appealing to PE cfsg.com.au Quantive. Lower-capex businesses free up cash to service debt, pay dividends, or reinvest in growth cfsg.com.au.

Typical Targets

Light Manufacturing & Distribution: Asset-light operations with minimal PP&E replacement.
Software & Technology Services: Deliverables require little physical asset investment.
Consumer & Business Services: Focus on labor and expertise rather than plant and equipment.

Low Customer Concentration

Managing Concentration Risk

When a single customer accounts for more than 20–30% of revenue, the loss of that account can imperil the entire business Allianz Trade Corporate Montage Partners. PE firms thus seek diversified customer bases to mitigate this dependency.

Due Diligence Focus

Revenue Analysis: Breakdown by client to ensure no outsized exposures.
Contract Terms: Review length and renewal rates to assess stickiness.
Market Position: Evaluate the company’s ability to win new accounts.

Service and Maintenance Businesses

Why Service & Maintenance

Fragmented service markets (e.g., lawn care, pest control, HVAC) are ripe for “roll-up” strategies, where PE adds value through consolidation, operational improvements, and cross-selling PE Hub themiddlemarket.com. Recurring maintenance contracts provide predictable cash flows and high customer retention Home.

Illustrative Subsectors

Home Maintenance: Lawn care, pest control, inspections—PE deals in this space have accelerated since 2018 PE Hub.
HVAC & Plumbing: Fixed-service and break/fix contracts underpin robust margins; recent exits (e.g., Morgan Stanley’s sale of Sila Services) underscore the appeal Reuters.
Electrical & Mechanical Services: MEP trades offer essential, recession-resilient work and consolidation potential Home.

Residential and Commercial End Markets

Broad Market Exposure

By spanning both residential and commercial customers, platform companies can smooth cyclical swings in any one segment Reuters. Residential maintenance tends to be more recession-resilient, while commercial contracts often carry higher ticket sizes and longer durations themiddlemarket.com.

Notable Deals

Neighborly Co. (KKR): A global roll-up in plumbing, electrical, and HVAC across residential and light commercial markets themiddlemarket.com.
Sila Services: Morgan Stanley’s PE arm built a diversified HVAC, plumbing, and electrical services platform before exiting to Goldman Sachs Reuters.

Private equity’s playbook consistently favors businesses with recurring revenue, low capital requirements, diversified customer bases, and service-oriented models across multiple end markets. Understanding these criteria can help entrepreneurs position their companies for PE investment or acquisition.

Click here to learn more about 48North Partners and Chapin Newhard.