Why Private Equity Sets the Tone in Valuations for Privately Owned Businesses
For many owners of privately held businesses, valuation is one of the most opaque aspects of the M&A process. Conversations about “multiples” circulate widely, stories of exceptional exits travel quickly, and expectations often form long before a business ever enters a formal sale process.
Yet when transactions actually happen, one group consistently shapes the benchmark against which value is judged: Private Equity investors.
Even when a business ultimately sells to a strategic buyer, it is often Private Equity that has set the valuation framework in the background. Understanding why this happens—and what it means for owners - is essential for anyone thinking about their long-term ownership strategy.
Valuation is not set by theory. It is set by capital.
In theory, business valuation is an analytical exercise. Discounted cash flow models, comparable transactions, industry multiples, and financial projections all play a role. In practice, however, valuation is determined by a much simpler force: the price credible buyers are willing and able to pay.
Private Equity firms have become the most consistent, disciplined, and active buyers of mid-market businesses across Europe. Their investment activity is continuous, data-driven, and backed by institutional capital. As a result, they generate the most reliable and repeatable pricing benchmarks.
Strategic buyers may occasionally pay more. But Private Equity defines the baseline.
The rise of Private Equity as the dominant mid-market buyer
Over the past two decades, the European mid-market has changed fundamentally. Private Equity has moved from a niche financing solution to a central pillar of corporate ownership.
Today, PE firms are among the most active acquirers of privately owned businesses in sectors ranging from professional services and healthcare to technology, education, media, and business services. Their investment cycles are ongoing. Their capital is pre-committed. Their need to deploy funds is constant.
This consistency matters. Markets are shaped by repeat participants. Because Private Equity firms are always in the market, they continuously update and refine their valuation frameworks.
For founders, this means that PE expectations often define what the market considers “normal.”
Why Private Equity valuation frameworks are so influential
Private Equity investors operate within a highly structured environment. Their investment decisions must withstand scrutiny from investment committees, limited partners, lenders, and ultimately future buyers at exit. This discipline produces valuation methodologies that are both rigorous and transparent.
Several factors make PE pricing particularly influential.
First, Private Equity firms rely heavily on comparable transactions. Every acquisition feeds data into future pricing decisions. Over time, this creates a self-reinforcing market benchmark.
Second, PE firms invest with a defined time horizon. They must understand how today’s valuation will translate into tomorrow’s exit. This forces them to price businesses in a way that future buyers are likely to accept.
Third, Private Equity relies on leverage. Debt providers impose their own discipline, requiring realistic cash flow assumptions and conservative risk assessment. This further anchors valuation expectations.
Together, these forces create a pricing framework that is difficult for the broader market to ignore.
To learn more about how Private Equity works, download our Report “Exit to Private Equity - An Insider Guide for Founders, CEOs and Professional Investors”.
Why strategic buyers rarely set the baseline
Strategic buyers—corporates acquiring businesses in their sector—are often seen as the ultimate valuation drivers. After all, they can pay synergies. They can integrate operations. They can justify higher prices.
While this is true in individual cases, strategic buyers are less consistent than Private Equity investors. Their acquisition activity depends on internal strategy, leadership changes, and market cycles. Years may pass between acquisitions. Pricing frameworks vary widely.
Private Equity, by contrast, is continuously active and structurally incentivised to deploy capital. This consistency gives PE outsized influence in setting valuation expectations.
In many transactions, strategic buyers price their offers relative to what Private Equity is willing to pay.
The concept of the “valuation anchor”
In practice, most sale processes develop a valuation anchor early. This anchor is rarely stated explicitly, but it shapes negotiations throughout the process.
Private Equity often provides this anchor.
When PE firms analyse a business, they build detailed investment cases based on realistic growth assumptions, leverage capacity, and exit expectations. These models produce valuation ranges that are internally defensible and externally credible.
Even if a strategic buyer later offers a premium, the starting point has already been established. Without the PE benchmark, that premium would be difficult to define.
Why PE valuation discipline benefits founders
At first glance, the idea that Private Equity sets valuation tone may sound limiting. Some founders worry that PE firms impose ceilings rather than create opportunity.
In reality, the opposite is often true.
By establishing credible valuation frameworks, Private Equity creates transparency and competition. It reduces reliance on anecdotal comparables and ensures that pricing reflects real market dynamics.
This discipline allows founders to:
understand realistic expectations,
engage multiple buyer types confidently,
and negotiate from a position grounded in market reality.
Without this framework, valuation discussions would be far more subjective—and often less favourable to sellers.
How Private Equity underwrites value
To understand why PE pricing carries weight, it helps to examine how PE firms actually value businesses.
Private Equity does not buy companies based on headline growth alone. Investors assess a combination of factors, including:
the predictability of cash flows,
the resilience of the business model,
the quality of management,
the potential for operational improvement,
and the credibility of future exit scenarios.
These drivers extend beyond financial performance. They encompass the broader narrative of how value will be created and realised over time.
This holistic approach produces valuations that are robust under scrutiny. That robustness is what gives PE pricing its authority.
The feedback loop between entry and exit
Private Equity valuation is inherently forward-looking. Investors must consider not only how they will buy a business, but how they will eventually sell it.
This creates a feedback loop. Exit markets influence entry pricing. Entry pricing influences exit expectations. Over time, this cycle stabilises valuation norms.
Founders sometimes encounter this dynamic during negotiations. Buyers reference “market multiples” or “exit assumptions.” These are not abstract concepts. They are grounded in real transactions.
Because Private Equity participates in both sides of the cycle - buying and selling - it plays a central role in maintaining this feedback loop.
Why valuation is about structure as much as price
Another reason Private Equity sets the tone is its focus on deal structure. PE transactions rarely revolve around headline price alone. Governance, reinvestment, leverage, and future upside all shape the overall outcome.
This emphasis influences how the broader market evaluates deals. Strategic buyers increasingly adopt similar frameworks, recognising that valuation cannot be separated from structure.
For founders, this means that understanding PE valuation is essential even when the eventual buyer is not a PE firm.
The importance of preparation
Because Private Equity pricing is disciplined and data-driven, preparation becomes critical. Businesses that understand PE valuation drivers early can position themselves more effectively.
Preparation does not mean preparing to sell immediately. It means understanding how external investors will view the business, where value is strongest, and where risks may be perceived.
Owners who engage with these questions early often achieve better outcomes - whether they ultimately sell, partner, or remain independent.
Common misconceptions about Private Equity pricing
Several misconceptions persist among founders.
One is that Private Equity always pays less than strategic buyers. While strategic buyers may pay premiums in specific circumstances, PE firms frequently compete aggressively for high-quality assets.
Another misconception is that PE pricing is purely financial. In reality, operational and strategic factors play a significant role.
A third misconception is that valuation is fixed. In practice, preparation, positioning, and process design can materially influence outcomes.
Why understanding PE valuation matters even if you never sell to PE
Perhaps the most important point is this: Private Equity shapes valuation benchmarks across the entire mid-market.
Even founders who ultimately sell to strategic buyers, family offices, or management teams benefit from understanding PE perspectives. These perspectives inform negotiation dynamics, buyer expectations, and deal structures across the market.
In that sense, Private Equity acts as the reference point for valuation discussions.
The role of independent advice
For owners, navigating valuation dynamics can be challenging. Information is fragmented. Comparables are opaque. Buyer incentives are not always visible.
Independent advice helps translate market signals into practical guidance. It helps owners understand what drives valuation in their specific context and how to engage with the market on informed terms.
Importantly, this process often begins long before any transaction is considered.
A final reflection
Private Equity did not set out to become the valuation benchmark for privately owned businesses. It became the benchmark through consistency, discipline, and scale.
For founders, CEOs, and professional investors, this reality offers an opportunity. By understanding how Private Equity thinks about value, owners can make more informed decisions - about timing, positioning, and long-term strategy.
A quiet next step
If you are beginning to think about the future of your business, understanding valuation dynamics early can provide clarity and confidence.
Not to trigger a transaction. Not to create pressure.
Simply to understand how the market is likely to view your business - and what that means for the choices ahead.
This article reflects Dyer Baade & Company’s experience advising founders, CEOs and professional investors of privately owned businesses across Europe on valuation, Private Equity transactions, and long-term ownership strategies.