READY FOR JASON: Ask Page — What does a PE firm look for when buying software companies?

FINAL DRAFT

Short answer: Sustainable free cash flow, a defensible market position, and a management team that can execute a growth plan without the founder. Everything else is secondary.

The PE underwriting model starts with free cash flow. They are going to pay a multiple of EBITDA and layer in leverage. The math only works if the cash flow is real, recurring, and stable. Software businesses with high gross margins (70%+), predictable subscription revenue, and low churn fit this model well.

What specific factors move the valuation multiple higher:

Growth rate. Even 15% to 20% annual growth at profitable scale is premium-worthy. Flat or declining growth is the fastest way to a discount.

Net revenue retention. NRR above 110% signals that existing customers are expanding. PE buyers love this because it means revenue grows without incremental sales cost.

Customer concentration. Below 20% for the largest customer is clean. Above 30% requires explanation. A single customer above 40% of revenue is a near-deal-killer for most PE buyers.

Management depth. Can this business run without you? If the answer is no, the buyer will price that risk into the deal structure, usually through aggressive earn-out terms or lower upfront.

Market dynamics. PE firms want to hold for 3 to 7 years and sell at a higher multiple than they paid. That requires the market to still be growing when they exit. If your category is being disrupted by AI or a platform shift, buyers will see that.

Related: What is the difference between strategic and financial buyers? | Can I sell my bootstrapped company to private equity?

-- Drafted by Bolt 17 Aug 2026 | Part of W1 Ask Page Batch 3