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We spend years building our businesses. Finding customers, growing revenue, improving margins, and trying to make sure there’s enough money left over at the end of the year.
And when we start thinking about selling, we naturally focus on those same numbers.
But there’s something that happens during private equity due diligence that I think catches a lot of business owners off guard.
The buyer starts asking questions about your people.
Who runs the business when you’re gone? Who owns the important customer relationships? What happens when a key employee leaves? How do you hire? How many people have quit in the last year?
And suddenly, you realize they’re trying to figure out something much bigger than whether your business makes money.
They’re trying to figure out whether it can keep making money without you.
That’s a very different question.
Why Private Equity Due Diligence Starts With Your Management Team
Most business owners think having great employees makes their business more valuable. And it absolutely can.
But having great employees and having a business that can consistently find, develop, and keep great employees are two different things.
During private equity due diligence, investors want to know whether your management team can execute the business strategy without your daily involvement.
They want to know whether you’ve developed strong people in every critical part of the company. Whether someone can step into your role. Whether your managers actually manage, or whether everything eventually comes back to you.
And I think this is where we have to be careful as founders.
Because we can build a very successful business while quietly making ourselves responsible for almost everything that matters.
We know the customers. We solve the difficult problems. We make the hiring decisions. We’re the ones people come to when something goes wrong.
That might make us valuable to the business.
But it also makes the business dependent on us.
And when someone is considering buying it, that dependency becomes a risk they have to evaluate.
The People Your Business Cannot Afford to Lose
Another major part of private equity due diligence is something called talent concentration risk.
It’s a fairly simple concept.
How many people could leave your business tomorrow and seriously damage its ability to perform?
Maybe it’s someone who manages your largest customer relationships. Maybe it’s the person who understands a critical technical process. Maybe it’s a manager who holds an entire department together.
The concern isn’t necessarily that these people will leave.
It’s that so much of the company’s performance depends on them staying.
And we have to remember, investors are buying the future earnings of the business. They’re trying to understand how predictable those earnings really are.
If one or two people carry a disproportionate amount of the company’s knowledge, relationships, or operational capability, that introduces uncertainty.
Which means we need to look beyond whether we have good people today and ask whether we’ve built an organization that can survive losing them.
Your Hiring Process Says More Than You Think
Here’s another area where I think founders underestimate what investors are looking for.
Recruitment.
We tend to evaluate hiring by whether we filled the position and whether the person worked out.
Investors look at something else.
Can the business repeatedly attract and select high-quality people without relying on the founder’s personal judgment?
That’s an important distinction.
Because if we’re the only person who knows how to recognize a great candidate, we haven’t really built a hiring process. We’ve built a company that depends on our ability to make good hiring decisions.
Private equity due diligence examines whether recruitment is documented, repeatable, and producing consistent results.
And then investors look at what happens after those people arrive.
How many are still there after 12 months? How many employees are leaving that we genuinely wanted to keep? Are people leaving particular departments or managers more frequently?
These questions start revealing whether the business has a hiring problem, a management problem, or a culture problem.
And those problems cost money.
What Employee Turnover Actually Costs Your Business
Let’s put some numbers around this.
Imagine a healthcare business with 150 employees and annual turnover of 25%.
That means approximately 38 people need to be replaced each year.
At an average recruitment cost of $2,500 to $4,000 per hire, that’s roughly $94,000 to $150,000 in direct recruitment expense.
And that’s before we account for the time managers spend dealing with performance problems, vacancies, onboarding, and employees who haven’t reached full productivity.
Now imagine that same business invests in better managers, structured onboarding, and a deliberate effort to retain good employees.
Turnover drops from 25% to 15%.
Instead of replacing approximately 38 employees, we’re replacing about 23.
That’s 15 fewer hires every year.
At those recruitment costs, that’s approximately $37,500 to $60,000 in annual direct savings.
And if those savings flow through to EBITDA, at a 7x valuation multiple, we’re talking about roughly $262,500 to $420,000 in additional enterprise value.
From reducing employee turnover alone.
The original broader cost estimate for this example is $375,000 to $600,000 annually when replacement-related costs and lost productivity are considered. If those broader costs fall proportionately, the potential savings are $150,000 to $240,000, representing approximately $1.05 million to $1.68 million in value at 7x.
Those are illustrative numbers, but the principle matters.
We often look at people investment as an expense.
Yet better retention, stronger management, and more effective hiring can improve what the business earns while also making those earnings more dependable.
That’s why this matters so much when we’re preparing to sell.
Private Equity Due Diligence Looks Beyond Hiring and Retention
Investors also want to understand how we manage performance.
Are expectations clearly documented? What happens when someone consistently underperforms? Do managers know how to help people improve, or do problems continue until someone eventually leaves?
They’re also examining how efficiently we spend money on recruitment, how dependent we are on outside agencies, and whether the cost of managing our workforce makes sense for the size of the company.
Even our reputation as an employer matters.
What are current and former employees saying about the business? Is that reputation improving or deteriorating?
All of these things help a buyer understand whether the company has built the people and management practices necessary to continue performing after an ownership change.
And that’s really what private equity due diligence is trying to establish.
Are You Building a Business or Making Yourself Indispensable?
I think there’s an uncomfortable question we all need to ask ourselves.
If someone bought your business tomorrow, what exactly would they be buying?
Would they be buying a company with strong managers, a reliable hiring process, good employee retention, and people who know how to perform without you?
Or would they be buying a company where you’ve spent years becoming the person everyone depends on?
Because those two businesses might have the exact same revenue and EBITDA today.
But they don’t carry the same risk.
And they may not command the same valuation.
If our goal is to move from being the owner-operator to becoming the owner-investor, we have to start building a company that doesn’t need us involved in every important decision.
That means developing managers, protecting critical knowledge, improving how we hire, and creating an environment where good employees actually want to stay.
The earlier we make those investments, the more time we have to benefit from the earnings improvements and demonstrate that they’re sustainable.
And here’s what I keep coming back to.
We can spend our entire careers becoming indispensable to our businesses.
We can become the best salesperson, the best problem solver, the person who knows every customer and makes every important decision.
And then one day, when we’re ready to sell, discover that the very thing we spent years becoming is one of the biggest reasons someone is nervous about buying what we’ve built.
That’s a difficult place to find ourselves.
Especially when the whole reason we built the business was to create something valuable for ourselves and our families.
The question isn’t how much your business needs you today. It’s whether you’re willing to build a business that won’t need you tomorrow.
Justin D Maxwell provides family office and investment bank services to the lower midmarket to founders who want 8 or 9 figure net worths. You can learn more here: www.justindmaxwell.com or take our free assessment here: https://fielding.global/articles/diagnostic.html