Due Diligence in Investing: What Sellers Want in PE Firms

4 Min Read

In today’s market, buyers outnumber sellers as the volume of private equity investors and easier access to capital continues to balloon. Company valuations keep climbing as the pool of contenders pursuing buyouts increases. With this shift in demand, the way PE needs to approach due diligence in investing has evolved. PE firms need to dial in business metrics and quantitative research. But they should also consider the role strategic relationships, such as leveraging private equity advisors, have in closing a deal.

The value of experts in due diligence in investing

Due diligence in investing remains the foundation of effective decision-making in M&A deals. For PE investors, due diligence in investing involves a meticulous evaluation of a target company’s financial health, operational framework, and potential risks. By balancing “hard” due diligence—such as auditing financial statements, cash flow projections, and liability exposure—with “soft” due diligence that examines leadership dynamics, cultural fit, and operational alignment, firms can identify both hidden risks and untapped opportunities. This dual approach ensures deeper insights into future growth potential, intellectual property valuation, and efficiency gaps. But it doesn’t paint the full picture.

If PE firms want to position themselves as the preferred buyer in a process, they need to demonstrate they’ve collected industry insight through research and can articulate a growth plan. But perhaps most importantly, they need to show they have they both understand the industry and have the right access to industry relationships.

Without expertise in a new market, even the most comprehensive private equity due diligence can lead to PE firms missing key industry nuances. Engaging with expert advisors who bring sector-specific knowledge can provide the clarity and depth needed to navigate unfamiliar territory.

Advisors help uncover opportunities, validate strategies, and address risks, ensuring that PE firms approach each deal with confidence and precision, setting the foundation for long-term success.

Sellers’ expectations of buyers are far greater than just a check. They are asking more questions of buyers and the PE firm that can best answer these questions and appeal to the owner’s motives and interests will inevitably come out on top. Simply put, private equity investors need to find and demonstrate their edge over other M&A sponsors—and industry expertise can give them that edge.

When sellers take the lead with due diligence

But it’s not just buyers who are engaging in pe due diligence. Sellers are conducting their own diligence practices too. In a report about market sustainability on axial.com, senior banker Steve Rathbone from Stout Advisory said, “Due diligence in 2018 versus 2007 is a more extensive, thorough process on the buy-side, and sellers are now frequently conducting sell-side diligence and quality of earnings prior to going to market.”

The PE firm that can better understand what questions business owners are asking, will be prepared to provide compelling answers.

Seller preparation

Sellers look at a number of drivers to see how transaction-ready their business is. Some of those barometers include questions such as:

• Is my business right for a PE buyer?
• Can I show clear growth potential?
• What are the business’ weaknesses and how can I strengthen them?
• What sales trends should I consider?

Other factors include profitability recasting, customer concentrations and depth of management. Evaluating these areas gives the seller leverage when it’s time to negotiate with the buyer.

Once the seller has determined if they’re a good fit for PE, they need to figure out who the right buyer is. Sellers generally choose private equity investors over other strategic buyers because PE has a lean management style that avoids wasting time and money. According to an article about PE strategy on hbr.org, PE firms, for the most part, are more influenced by the opportunity to sell than finding ways to share costs, capabilities and customers among their businesses. If this fits the seller’s vision for the company, PE is a no-brainer.

The adequacy question

Once the seller has determined PE is the right direction, the first benchmark they measure is adequacy — can the buyer demonstrate the financial and operational fundamentals of a buyout firm? Can they offer a fair market price and buy, sell and grow the company, securing high rates of return for all co-investors?

Because most PE firms already meet these adequacy requirements, they need to find other ways to edge out the competition.

What will convince the seller to choose one private equity investor over another? It helps to understand the seller’s perspective and what their ultimate motives are. For example, most sellers are coached to negotiate with multiple PE firms, which generally leads to higher valuations and better agreements for them.

Many sellers are financially driven, so the size of the offer matters, especially in this high-priced, deal-making environment. Other business owners have different motivations about when and where to sell, such as retirement plans and other timelines that fit their personal lives. Many also feel a sense of community to the town or city they live in. They are concerned about the welfare of their employees and employees’ families. They want to feel a sense of partnership while transitioning the company to PE on their terms.

How to gain a competitive edge

If a PE firm is up against other capital providers who meet the seller’s price, they can edge out the competition if they do the following:

• Understand the seller’s vision for growth
• Articulate they are informed about the seller’s market
• Demonstrate they understand company’s current position
• Show they have resources in place to scale the company
• Can clearly articulate the transition and future for the owner and employees

Above all, the private equity investors need to be able to provide the seller with a credible plan to compete — one that leverages industry experts, market data and key influential relationships that will aid in advancing portfolio growth. They should present a plan that speaks to scaling the business in terms the seller most identifies with.

Can PE expert networks strengthen due diligence?

For private equity firms looking to stand out to a seller, working with a private equity expert network can be a game-changer in due diligence in investing. 

Why?

Because gaining a competitive edge often hinges on the quality of insights and expertise a private equity firm can bring to the table. Expert networks tailored to due diligence consulting can connect private equity firms with industry leaders, former executives, and specialists with hyper-relevant experience. 

By integrating expert advisors into your investment due diligence process, you can:

• Gain deeper industry insights to refine your growth and scaling strategies.
• Address niche market challenges with precision and confidence.
• Validate your assumptions about the target company’s potential.
• Build seller confidence by demonstrating a thorough understanding of their business and market.

As a leading expert network for private equity, our team at Apex Leaders offers unmatched access to seasoned advisors to help your firm make smarter investment decisions with confidence.