When people hear “private equity,” they often think of big firms buying companies, cutting costs, and selling them for massive profits. But the truth is more nuanced and, thankfully, far more useful to business owners.
At its core, private equity is about systematically creating value. PE firms don’t rely on luck or timing; they rely on structure, discipline, and insight.
Here’s the good news: you don’t need to sell your company or raise millions to apply the same methods.
Let’s unpack how private equity firms actually build value, and how you can, too.
The Three Ways Private Equity Firms Grow Value
Private equity investors use three main “levers” to increase a company’s value over time:
- Financial Engineering (Deleveraging)
In the 1980s, many PE firms used heavy debt to buy companies, sometimes financing nearly all of the purchase price. As the company paid down the debt with its cash flow, the owners’ equity grew in value.
This approach, known as leverage, can amplify returns — but it also increases risk. It’s less common today, especially in uncertain markets.
- Multiple Expansion (Market Timing)
If a firm buys a company when valuations are low and sells when they’re high, it benefits from “multiple expansion.” That’s partly market luck and partly about improving how the company is perceived.
For example, moving from a small, local operator to a scalable, professional organization can decrease risk and increase perceived value for the next buyer, leading buyers to pay a higher multiple of EBITDA.
- Operational Improvement (The Modern Engine of Value)
This is where most PE firms focus now, and where long-term value truly lives. Operational improvement means making the business itself run better: sharper strategy, smoother operations, stronger leadership, and tighter financial controls.
Value Creation: The Three Pillars
Modern PE success is built on three interconnected pillars:
Strategic Focus
PE firms start by clarifying what the business is really great at — as well as what’s distracting it. They double down on high-margin segments, prune low-performing products, and align leadership around measurable goals.
Operational Efficiency
They then dig into how work gets done. In manufacturing, that might mean optimizing plant layouts or streamlining supply chains. In service firms, it could involve standardizing processes, adopting better technology, or improving scheduling.
The goal: fewer bottlenecks, more output, and higher margins.
Financial Discipline
Finally, PE firms excel at using data. They set key performance indicators (KPIs), monitor dashboards, manage cash cycles, and make sure every dollar of investment drives return.
Financial clarity becomes a daily management tool, not just an annual report.
What All Business Owners Can Learn From This
You don’t have to sell to a private equity firm to benefit from these strategies.
In fact, applying these principles can strengthen your business and increase its value — a significant advantage whether you plan to hold the business long-term or pursue a future exit.
Here’s where to start:
Know your numbers. Understand what drives your profit and cash flow.
Streamline your operations. Look for inefficiencies that drain resources.
Use data to make decisions. Build simple dashboards that show what’s working.
Hire and empower great people. Talent is one of the biggest multipliers of value.
Plan with the end in mind. Even if you never plan to sell, think like someone who might and make your business easy to run, easy to grow, and easy to transfer.
Bottom line? Operate like you’re preparing to sell even if you’re not.
What Happens When You Start Thinking Like a PE Firm?
At the core, you start running your company more intentionally. That means:
- Every investment is made with a return in mind.
- Every process has a measurable outcome.
- Every leader knows their numbers.
- And most importantly, all the value you create stays with you.
If you’re ready to think like a seller but operate like an owner, we’ll help you build a company that’s worth more every year — whether or not you ever sell it.