Private equity isn't buying your past: Why valuation is all about the future
Private equity doesn't fall in love with what you've already accomplished.
They're not paying a premium for the blood, sweat, and 80-hour weeks that got you to $5M or $15M in EBITDA. They're not interested in the heroic story of how you bootstrapped from your garage, survived the 2008 crisis, or personally closed your biggest customer.
They're buying the runway ahead of you—and their confidence that you (or the team that stays) won't derail the plane during takeoff.
The Hard Truth About Historical Performance
Your historical growth matters, but not in the way you think. Valuation multiples are driven by factors like industry trends, company size, growth potential, and the macroeconomic environment—not just past performance. Your track record serves as evidence that the business model works and that management can execute. But evidence isn't the same as the investment thesis.
Private equity firms are underwriting the next three to five years, not celebrating the last ten. They're looking at your financials and asking: "Can this trajectory continue or accelerate without the current owner in the driver's seat?"
That's the crucial question. And every operational weakness, every owner dependency, every customer concentration risk becomes a direct discount to your multiple—because it increases the odds that someone screws it up post-close.
What Actually Drives Your Multiple
When PE firms evaluate businesses, they apply valuation multiples—typically enterprise value divided by EBITDA—to determine what they're willing to pay. According to McKinsey data, global PE buyout entry multiples have hovered around 11x EBITDA in recent years, though this varies significantly by size, sector, and company characteristics.
But here's what most owners miss: your multiple isn't just about your EBITDA. It's about the specific risks tied to your business model. Several factors influence what buyers are willing to pay:
Business size and stability: Larger businesses with deeper management teams and more established market positions command higher multiples because they present less risk.
Growth trajectory: Revenue growth is critical because it's one of the main levers PE firms use for value creation. But growth can't just be on a PowerPoint slide—it needs to be systematic and repeatable.
Owner dependency: This is often the killer. When a business is heavily reliant on its owner for daily operations, key relationships, or critical decisions, buyers perceive significantly higher risk. Many owners don't realize they may only receive a down payment for the value of their business, with the remainder contingent on proving the business can operate without them.
Customer concentration: If your top customer represents more than 10-15% of revenue—or your top five represent more than 25%—you've got a problem. Buyers know that losing a major customer could crater your revenue, and they'll discount accordingly.
Capital intensity and operational complexity: Businesses requiring heavy ongoing capital expenditures or those with complex, poorly documented processes trade at lower multiples because they're harder to scale and optimize.
The Owner Dependency Problem
Let's talk about the elephant in the room: you.
Most successful small business owners are intensely involved in their companies. You know every customer personally. You've built systems in your head. You're the one who swoops in to fix problems. You're the glue holding it all together.
And that's exactly what's killing your valuation.
Owner dependency creates tangible valuation discounts that can range from 20% to 45% or more, depending on the severity. Here's why: when you're the single point of failure, buyers see massive transition risk. What happens if you get hit by the proverbial bus tomorrow? What percentage of customers leave? Which employees quit? What institutional knowledge disappears?
The companies that command the highest multiples aren't always the ones with the flashiest historical growth rates or the biggest EBITDA. They're the ones where the founder has systematically removed themselves as the single point of failure and built an operation that can compound with or without them in the seat.
Research shows that potential buyers seek answers to several critical questions:
Is the company dependent on the owner for its success?
Are key relationships tied to the owner or a key employee?
What key employees will be staying with the business through the transaction?
These questions directly impact valuation. A business that can't operate effectively without its owner is less valuable—period. Buyers will either walk away, significantly lower their offer, or structure the deal with lengthy earnouts and contingencies that shift risk back to you.
Customer Concentration: The Silent Value Killer
Customer concentration is another major factor that directly impacts business valuation. When a small number of customers generate a disproportionate share of revenue, it creates vulnerability that buyers cannot ignore.
Industry experts suggest that optimal customer concentration should be less than 10% of sales from a single customer and less than 25% from the top five customers. Exceeding these thresholds raises red flags for several reasons:
Revenue volatility: If you derive 60% of your revenue from two clients, losing one could result in an immediate 30% revenue drop. That's an existential threat buyers won't underwrite at a premium multiple.
Reduced negotiating power: Large customers who know they're critical to your business have leverage to demand price cuts, better terms, or preferential treatment—all of which compress your margins and make the business less attractive.
Transition risk: Buyers wonder whether key customer relationships will survive a change in ownership. If those relationships are personal rather than institutional, the risk multiplies.
In one recent transaction, a deal for a $5M company completely unwound because customer concentration was too high and the buyer couldn't get comfortable that key customers would remain after the sale. In another case, a buyer eventually completed the transaction but only after implementing strict protective measures and renegotiating the purchase price significantly downward.
The impact varies by industry. In restaurants and bars, customer concentration is rarely an issue because the customer base is naturally diversified. In manufacturing and wholesale businesses, however, reliance on a few large clients is common—and dangerous. Even in specialized industries where limited buyers exist (aerospace, defense contracting), the concentration creates valuation pressure.
What Private Equity Actually Does With Your Business
Once PE firms acquire companies, they focus heavily on operational value creation. The era of relying primarily on financial leverage and multiple expansion to drive returns has largely ended. With rising interest rates and normalized valuations, PE firms have shifted their emphasis toward improving the operations of portfolio companies.
These improvements typically fall into several categories:
Revenue growth: PE firms work to accelerate organic growth through improved sales processes, market expansion, and product innovation. They may also pursue inorganic growth through add-on acquisitions that create synergies.
Margin expansion: By implementing best practices, optimizing supply chains, and leveraging technology, PE firms drive EBITDA margin improvements that compound returns over the holding period.
Operational excellence: This includes everything from streamlining workflows and eliminating waste to implementing data-driven decision-making processes and upgrading technology infrastructure.
What this means for you as a seller: PE firms are evaluating whether your business can support these value creation initiatives. A business that's already systematized, with documented processes, strong management, and diversified customer relationships, is a much better platform for these improvements than one held together by the founder's heroic daily interventions.
The Multiple Expansion Opportunity
Here's something most owners don't realize: PE firms can often achieve "multiple arbitrage" by buying at a lower multiple and selling at a higher one. This happens when operational improvements, market positioning, and professionalization of the business justify a higher exit multiple.
For example, a fragmented industrial company might be acquired at 6x EBITDA but command 10x after operational improvements and strategic repositioning. This multiple expansion represents a significant source of returns for PE firms—but it only works if the business is improvable.
If your business is already optimized, with limited room for operational enhancement, or if it's so owner-dependent that improvements are impossible without you, then multiple expansion becomes unlikely. That constraint gets priced into your entry multiple.
One Question Every Owner Should Ask
If you're a founder or CEO thinking about an eventual exit—whether that's 18 months or 8 years away—ask yourself one question today:
"What part of this company dies if I get hit by a bus tomorrow?"
Be brutally honest. Walk through every function:
Sales: Do key customer relationships live with you, or are they institutional? Can your sales team operate autonomously, or do they need you to close deals?
Operations: Are processes documented, or do they exist only in your head? Can your operations team handle problems without escalating everything to you?
Finance: Does anyone else understand the numbers the way you do? Could someone step in and run financial planning and analysis tomorrow?
Strategy: Is there a management team capable of making strategic decisions, or does everything run through you?
Culture: If you left, would the culture hold, or was it entirely dependent on your personality and presence?
Whatever you identify as critical dependencies, those are the parts killing your valuation. Fix them systematically, starting with the highest-impact areas.
Building a Business That Commands a Premium
The good news: reducing owner dependency and customer concentration isn't just about maximizing your exit multiple—it's about building a better, more sustainable business today. The process makes your company more valuable whether you sell in two years or twenty.
Here's what that looks like in practice:
Document everything: Every process, every workflow, every client protocol should be written down. If it's only in your head, it doesn't exist from a buyer's perspective. Proper documentation makes transitions seamless and reduces perceived risk.
Build a real management team: Invest in developing leaders who can run functions independently. Give them authority, hold them accountable, and step back. This takes time—often years—but it's non-negotiable for a premium exit.
Systematize customer relationships: Move relationships from personal to institutional. Have multiple people interface with key accounts. Create structured onboarding, regular business reviews, and multi-threaded relationships that survive personnel changes.
Diversify your revenue: Actively work to ensure no single customer exceeds 10-15% of revenue. This might mean turning down large projects or deliberately growing other parts of the business. The short-term pain is worth the long-term gain.
Create long-term contracts: Where possible, secure multi-year agreements with key customers that include transferability provisions. Contracts don't eliminate concentration risk, but they reduce it significantly.
Invest in technology and infrastructure: Modern tech stacks, data analytics capabilities, and automated workflows demonstrate that the business is ready to scale and doesn't depend on manual heroics.
The Real Investment Thesis
Here's what PE firms actually see when they look at acquisition targets: they see an EBITDA number, yes, but more importantly, they see a canvas for value creation. They're asking whether they can take your $15M EBITDA business and turn it into a $25M or $30M EBITDA business over their holding period through operational improvements, strategic initiatives, and add-on acquisitions.
If the answer is yes, they'll pay a healthy multiple. If the answer is "maybe, but only if the owner stays heavily involved for five years," the multiple drops. If the answer is "probably not because the business is too fragile," they walk away entirely.
FTI Consulting's research identifies several factors that commonly weigh down valuation multiples:
Structural risks in the market or business model
Geopolitical uncertainty
Dependency on key talent
Customer concentration
Lack of a compelling growth narrative
Unclear differentiation from competitors
Each of these represents a perceived barrier to value creation. The more barriers you've already removed, the higher the multiple you'll command.
Time to Sell: What the Market Rewards
When you eventually go to market, buyers will conduct extensive due diligence focused on these exact issues. They'll interview employees to assess whether the business can function without you. They'll analyze customer data to understand concentration risk. They'll review processes to determine how systematized the operation really is.
The businesses that sail through this process and command premium valuations share common characteristics:
Strong, independent management teams that don't need the owner for daily decisions
Diverse customer bases with no dangerous concentrations
Documented, repeatable processes that new owners can follow
Clear growth opportunities that don't require the founder's unique relationships or expertise
Financial systems that provide transparency and predictability
A compelling story about where the business can go, not just where it's been
These aren't nice-to-haves. They're the minimum requirements for a competitive process that drives multiple bids and premium valuations.
The Bottom Line
Private equity isn't buying your past. They're buying a future they believe in—and a team they trust not to screw it up.
Your historical EBITDA growth is proof of concept, nothing more. The real question is whether that growth can continue or accelerate without you micromanaging every detail. Can the business compound systematically? Can it integrate acquisitions? Can it expand margins through operational improvements? Can it enter new markets?
If the answer to these questions requires your constant involvement, you don't have a valuable business—you have an expensive job. And expensive jobs don't command premium multiples.
But if you've built something that can run, grow, and improve without you? That's when you've created real value. That's when private equity will pay up. That's when the multiple takes care of itself.
So ask yourself: what part of your company dies if you're not there tomorrow? Because that's the part costing you millions at exit.
Fix it now, while you still have time.
As an M&A transaction advisor specializing in sell-side preparation and exit planning, I help business owners identify and eliminate valuation killers like owner dependency, customer concentration, and operational weaknesses before they go to market. If you're building toward an eventual exit and want an experienced advisor to maximize your enterprise value, let's connect.