Selling to a private equity firm is not a full exit, at least not initially. A PE transaction typically involves selling a majority stake (60 to 80%) while the owner retains a meaningful minority and continues in a senior role through a three-to-five-year growth phase. The full exit comes at the end of the PE cycle, when the fund sells the business again. This is sometimes called a "two-bite of the cherry" structure.
How does a PE exit work?
A PE firm acquires a controlling stake, installs governance (board, reporting, KPIs), and works with management to execute a growth plan: typically a combination of organic growth, margin improvement, and add-on acquisitions. At the end of the hold period, the PE firm sells its stake to another buyer (another PE firm, a trade buyer, or via a listing), at which point the management team and remaining shareholders also realise their equity.
The founder's retained stake is typically rolled into new equity at the deal value. If the business grows as planned, the second exit generates a significantly higher absolute return on that rolled equity than the initial sale. This is the financial incentive for owners to participate in the journey.
Who does a PE exit suit?
PE is appropriate for businesses with genuine growth potential that requires capital, capability, or acquisitive firepower to realise. The PE firm's returns depend on growth, so they are not suited to mature, stable businesses where the owner simply wants a clean exit. The ideal PE target has: £1m+ EBITDA (lower mid-market), clear growth drivers, a capable management team beyond the founder, and a scalable model.
It suits owners who are energised by growth ambitions, comfortable with institutional governance and reporting, and willing to defer their full exit by 3 to 5 years in exchange for a potentially higher total return.
Financial and tax considerations
The initial sale generates a capital gain, taxed under BADR rules (18% to £1m, 24% above). The rolled equity is a future event. Critically, founders need to understand that the full return depends on the PE fund achieving its exit. There is no guarantee the second exit achieves the expected valuation.
PE firms require significant management information, clean accounts, and often a quality of earnings (QoE) report from a Big 4 or mid-tier accountant. Due diligence is more intensive than in a trade sale, and the legal documentation is more complex.
| Factor | Typical Position |
|---|---|
| Minimum EBITDA | £1m+ (lower mid-market); £3m+ for mainstream PE |
| Typical stake sold at initial deal | 60 to 80% |
| PE hold period | 3 to 5 years |
| Due diligence intensity | High: financial, commercial, legal, management |
Pros and cons of a PE exit
Advantages: Potential for highest total financial return across both exits; access to capital for growth; PE brings operational expertise and acquisition capability; management team retained and incentivised.
Disadvantages: Not a clean exit. Owner must remain engaged for 3 to 5 years; governance and reporting demands are significant; second exit is not guaranteed; cultural change as the business scales; intense due diligence process.
This page contains general information only. Speak to a qualified corporate finance adviser or tax adviser before making any decisions regarding the sale or transfer of your business.