Private Equity and SMEs: 8 Questions Every Business Owner Must Answer Before Negotiating with a Fund

Your phone rings. An analyst from a private equity fund wants to learn more about your business. Or maybe you've already received a letter of interest, an informal visit, or a tip from someone in your industry: "there are funds looking at companies like yours."

That call triggers two feelings at once: curiosity and wariness. What do they really want? Is this a genuine opportunity or just market reconnaissance? Would you know how to tell a serious offer from a fishing expedition?

At Fundenza, we've been advising business owners through private equity transactions for years. These are the eight questions every company should be able to answer before sitting down to negotiate.

What is private equity, and why would a fund be interested in my business?

Private equity (PE) funds raise capital from institutional investors — pension funds, family offices, insurers — with the aim of acquiring stakes in private companies, growing them, and selling their position at a profit within a 4-to-7-year horizon.

In Spain, the sector has grown significantly in recent years. According to ASCRI, over 1,200 PE transactions closed in 2025, more than 60% of which involved SMEs with EBITDA below €5 million. Funds have lowered their minimum deal size as competition for large assets intensifies and mid-market returns remain highly attractive.

What makes your company interesting to them? They look for businesses with these traits:

• Positive, recurring EBITDA (minimum €1-2M, ideally €3-10M)
• Tailwind sectors: technology, healthcare, B2B services, specialised manufacturing
• Organic and/or inorganic growth potential through bolt-on acquisitions
• A solid management team capable of executing an ambitious business plan
• Clear competitive barriers and a diversified customer base

What types of deals do PE funds do in Spain?

Not all funds operate the same way. Before you negotiate, you need to know what type of investor you're talking to:

Growth capital funds

These take a minority stake (20-49%) to finance expansion. They don't seek operational control. Ideal if you want to remain the majority owner while gaining capital and a network to accelerate growth.

Buyout funds

These acquire a majority (51-100%) of the company. The founder may reinvest a portion — the so-called rollover — and stay involved for 2-3 years. At the end of the fund's cycle, everyone sells together to a new buyer or through an IPO.

Turnaround or special situations funds

These focus on companies with financial or operational difficulties. If your business is healthy, you're unlikely to hear from this type of fund.

Practical tip: when a fund reaches out, ask directly: are you looking for a majority or a minority stake? That single answer tells you immediately what kind of partnership they're proposing.

How will a PE fund value my business?

Private equity funds apply a very specific logic: how much can I make in 5 years if I buy this today?

Their standard methodology is the EBITDA multiple, calibrated to their return model. Unlike a strategic buyer who might pay 8-10x for synergies, a financial buyer pays what allows them to achieve an IRR (internal rate of return) of 20-30% per year.

A simplified example:

• Your company has an EBITDA of €3M
• The fund estimates EBITDA will grow to €6M in 5 years
• Assumes an exit at 8x EBITDA = exit value of €48M
• To achieve a 25% IRR, the maximum entry price is roughly €14-16M (approximately 5x EBITDA today)

This is why PE funds tend to offer more conservative prices than strategic buyers: they have no operational synergies, only financial leverage and active management. They will also use bank debt to finance part of the acquisition (the famous LBO or leveraged buyout), which multiplies their return on equity but also increases risk for the acquired company.

What does the business owner give up — and what do they get in return?

This is the question that worries founders most, and rightly so. In a PE transaction, the owner gives up:

• Part or all of the equity: 100% in a full buyout, 20-40% in growth capital.
• Autonomy on strategic decisions: even if you remain CEO, investments above a certain threshold, key hires, or new debt will require the fund's approval.
• Some future upside: if you sell 100%, you cash out now. If it's a majority deal with a rollover, you receive part now and reinvest the rest in the new vehicle.

In return, the owner gains:

• Immediate liquidity: especially valuable if you've spent decades with your entire wealth tied up in the company.
• Capital to grow: geographic expansion, bolt-on acquisitions, technology investment.
• Network and operational expertise: the best funds bring real advisory support, sector contacts, and management experience.
• A second bite at the apple: if you reinvest in the rollover and the company grows, you may earn more on the second sale than the first.

How much control will I lose over my company?

It depends on the deal structure and how the shareholders' agreement is negotiated. But most funds include certain standard clauses:

• Information rights: monthly reporting, access to accounts, predefined KPIs.
• Reserved matters: prior approval required for key strategic decisions.
• Drag-along: if the fund wants to sell, they can compel you to sell your stake on the same terms.
• Tag-along: if the fund sells, you have the right to sell alongside them on the same terms.
• Earn-out or clawback: in some cases, part of the price is contingent on future performance.

The key is to define what "control" means to you. If you need to make day-to-day decisions without reporting to anyone, a buyout fund is not your ideal partner. If you're seeking capital and support to grow fast, sharing strategic control may be a fair trade.

What happens to the management team and employees?

This is often the question owners ask last, but worry about most.

The honest answer: it depends on the fund and the investment thesis.

• Growth capital funds tend to be conservative: they keep the structure intact, want the founder active, and avoid operational disruption.
• Buyout funds often bring in an industrial CEO or strengthen leadership with external profiles. There may be changes at the top, but not necessarily in the operational team.
• Turnaround funds do typically carry out deeper restructuring.

A reliable signal: ask the fund about their last three or four deals and what happened to the management team. Their answers — or their silences — will tell you a great deal about their management style.

How long will the fund stay in my company?

The standard PE investment horizon is 4 to 7 years from investment to exit. This determines the growth pressure you'll face throughout the partnership.

When the cycle ends, the fund seeks an exit, which may take the form of:

• A sale to another PE fund (secondary buyout)
• A sale to an industrial strategic buyer
• An IPO (less common for SMEs)
• A buyback by management or the original founder (MBO/MBI)

For founders who reinvest in the rollover, this represents a second genuine opportunity. If the company has grown from €3M to €7M EBITDA and is sold at 8x, the total value is €56M. A 20% rollover stake would be worth €11.2M — often far more than the founder received in the first transaction.

Is private equity better than selling to a strategic buyer?

There's no universal answer, but certain factors tilt the balance:

Consider a PE fund if:

• You want to remain involved in the business for 3-5 more years
• You have growth potential you haven't been able to realise alone due to lack of capital or management capacity
• You want to diversify your personal wealth without exiting the business entirely
• Your company doesn't obviously fit any single strategic acquirer

Consider a strategic buyer if:

• You want the maximum price today and a clean, final exit
• Industrial synergies with a specific buyer are clear and quantifiable
• You have no interest in accompanying a fund for 4-7 more years
• Your company has limited additional growth levers that PE could activate

At Fundenza, we typically recommend our clients explore both routes simultaneously. The competitive tension between a PE fund and a strategic buyer is, more often than not, what maximises the final price.

How to prepare before meeting a PE fund

If a fund has already reached out, don't respond unprepared. Before any serious meeting, make sure you have:

1. Normalised P&L: adjust EBITDA by removing non-recurring expenses, above-market owner compensation, and other legitimate sector-recognised adjustments.
2. A 3-to-5-year business plan: funds buy the future, not the past. You need to show credible, executable growth levers.
3. NDA before sharing data: never share confidential information without a signed non-disclosure agreement.
4. Your own specialist advisors: an M&A financial advisor and a PE-specialist lawyer. Don't go into this negotiation alone.
5. Your own valuation: enter the negotiation knowing what your business is worth. Don't wait for the fund to tell you.

Private equity in Spain has matured enormously over the past decade. Funds are more sophisticated — and business owners need to be too. The difference between a good deal and a great one almost always comes down to preparation and who you have in your corner at the negotiating table.