The entry of a private equity fund into a company is a transaction that fundamentally transforms the dynamics of the business: it provides capital, accelerates growth and professionalises management, but it also means sharing control, adopting more demanding corporate governance standards and committing to profitability targets and exit timescales. Being well prepared is the difference between a successful transaction and a process that consumes management time without ever closing.
What a Private Equity Fund Looks For
Private equity funds invest with a clear mandate: to generate above-market returns over a 4–7-year horizon. To do so they need companies with specific characteristics:
Profitability and growth potential. EBITDA is the central metric. Funds value recurring revenues, scalability of the business model and the existence of concrete growth levers: geographic expansion, add-on acquisitions, development of new product lines.
Strong management team. The fund invests in the team as much as in the business. An entrepreneur who is indispensable to day-to-day operations and has no identified successor is a risk that funds discount from the price.
Quality financial information. Funds want to see audited or reviewed accounts, analytical accounting that allows profitability to be understood by business line, and an annual budget with monthly tracking.
Minimum corporate governance. Updated articles of association, a functioning board of directors (even a family one), board and shareholder meeting minutes, and properly formalised contracts with key partners and employees.
How to Prepare: Operational Checklist
12 months before starting the process:
- Normalise financial statements so that EBITDA reflects the real operating performance of the business (strip out personal expenses, adjust owner-manager remuneration to market rates)
- Start or complete the audit of the last two financial years if none exists
- Formalise contracts with key employees and design retention plans
- Document critical operational processes (so the business is not entirely dependent on one person’s knowledge)
- Organise intellectual property, licences and key assets (ensure everything is in the correct name)
6 months before:
- Prepare the 3-to-5-year business plan with detailed financial projections and explicit assumptions
- Carry out or commission a vendor due diligence to identify and resolve issues before the buyer discovers them
- Define the expected valuation range and the deal structure (percentage to be sold, entrepreneur reinvestment, post-investment governance conditions)
When starting the process:
- Prepare the Information Memorandum describing the business, team, market and projections
- Identify the most suitable funds by sector, size and geography
- Appoint an independent financial adviser to manage the process (it is very difficult to run this process from within)
The Negotiation Process with a Fund
The process typically follows these phases: anonymous teaser submission → expression of interest → delivery of the Information Memorandum → letter of intent (LOI) with price and conditions → exclusive due diligence → negotiation of the investment agreement and shareholders’ agreement → closing.
The shareholders’ agreement is the most critical document of the transaction. It defines information rights, restrictions on the transfer of shares, joint exit mechanisms (drag-along, tag-along), management team incentives (sweet equity) and the conditions under which the fund can exercise its forced exit rights.
What Changes After the Fund Invests
The first transformation is in corporate governance: the board becomes an active body with fund representatives, audit and remuneration committees are created, and monthly management information is formalised with a shared management dashboard. These requirements are positive for the business, but they require investment in systems and processes that many companies do not have at the time of entry.
How BMC Can Help
Our private equity team advises business owners on preparation, process and negotiation of fund transactions, from the first conversation through to closing. We coordinate the independent valuation, due diligence and shareholders’ agreement advice under an integrated approach focused on the entrepreneur’s interests.
If you are considering bringing in external capital over the next one to two years, we recommend starting preparation now. The difference between a well-prepared company and one that is not is measured in valuation multiples.
Specific Legal Framework
The entry of a private equity fund into a Spanish company is governed by several rules that determine its structure and effects:
- Royal Legislative Decree 1/2010 of 2 July (Companies Act — LSC), Arts. 107–110 and 188: Regime for the transfer of shares in limited liability companies (pre-emption rights, statutory restrictions). The shareholders’ agreements that accompany PE entry must coordinate with the articles of association: what cannot be addressed in the articles must be channelled through a parasocial agreement.
- Ley 22/2014 of 12 November, regulating venture capital entities (LCR): Governs venture capital funds (FCR), venture capital companies (SCR) and closed-ended collective investment entities (EICC). Spanish-law PE funds must be registered with the CNMV; foreign-law funds are taxed under the applicable tax treaty or as EU entities if domiciled in the EU.
- Ley 27/2014 of 27 November, Corporate Tax Act, Arts. 76–89 (Tax Neutrality Regime): PE entry can be structured as an asset contribution (Art. 87), share exchange (Art. 80) or merger (Art. 76). The choice of vehicle determines the tax treatment for both the entrepreneur and the target company.
- Ley 35/2006, Personal Income Tax Act (LIRPF), Arts. 49–53: The entrepreneur’s rollover (reinvesting part of the proceeds in the new equity) can generate a capital gain at the time of transfer, unless correctly structured as a tax-neutral share exchange (Art. 37.1.e LIRPF).
- Regulation (EU) 651/2014 (General Block Exemption Regulation): PE funds operating in sectors with state aid must comply with European de minimis and compatible aid rules, particularly relevant in build-up transactions in regulated sectors (healthcare, education).
Sweet Equity: Structure and Tax Treatment
Sweet equity (shares at a nominal price for the management team as an incentive aligned with the fund’s returns) has specific tax implications:
| Structure | Tax treatment for the manager | Regulatory reference |
|---|---|---|
| Share options (stock options) | Employment income on exercise (IRPF Art. 17) with exemption up to €50,000/year if there is a vesting period | LIRPF Art. 42.3.f) |
| Phantom shares (virtual shares) | Employment income at the time of payment | LIRPF Art. 17 |
| Actual shares with restrictions | Employment income if granted at a discount; capital gain on disposal | LGT binding ruling V0172-23 |
Practical Example: PE Entry in Formación Digital Avanzada, S.L.
Scenario: Online training company with €4.2M revenue, EBITDA €820,000, sole founder aged 60, no formalised management team. PE fund interest: majority acquisition + 20% founder rollover.
| Preparation milestone | Initial status | Action (12–18 months before) | Impact on valuation |
|---|---|---|---|
| Audited accounts | None exist | 2024 and 2025 audits | +0.5x multiple (greater confidence) |
| Founder dependency | Founder manages 80% of sales | Hire commercial director, formalise processes | Reduces key-man risk |
| Tax liabilities | R&D deduction without supporting report (€130,000) | Obtain CDTI report, regularise | Eliminates guarantee holdback ~€170,000 |
| Intellectual property | Software not registered | Registration with OEPM, assignment to company | Legal certainty for main asset |
| Corporate governance | No board, no formal minutes | Board of directors + regularised minutes | Reduces legal risk |
| Valuation EBITDA multiple | 6x without preparation | 7.5x after preparation | +€1,230,000 in price (€820,000 × 1.5x) |
Common Mistakes BMC Helps Avoid
- Not normalising EBITDA before starting the process. The entrepreneur’s personal expenses included in the profit and loss account (car, insurance, travel) reduce the reported EBITDA. The fund will identify and deduct them in due diligence; better to do it first and control the narrative.
- Not resolving tax liabilities before due diligence. A tax liability identified by the buyer is always deducted from the price as a guarantee holdback with a multiplier factor. Resolving it before the process can be worth twice the cost of the correction.
- Selling without an independent financial adviser. The fund has experienced advisers with asymmetric information on market valuations. The entrepreneur without an independent adviser enters the negotiation of the multiple, debt adjustment and shareholders’ agreement clauses at a disadvantage.
- Not planning the rollover from a tax perspective. An entrepreneur who reinvests part of the proceeds in the PE vehicle’s equity may qualify for the tax-neutral share exchange regime (Arts. 37.1.e LIRPF and 80 LIS). Without prior planning, the rollover transaction triggers immediate tax liability that reduces the capital reinvested.
- Signing an LOI with exclusivity without having negotiated the key terms. The letter of intent (LOI) appears non-binding, but in practice it fixes the reference price and the deal structure. Signing it with vague terms and then trying to renegotiate them is very difficult once exclusive due diligence has started.
Next Steps
- Commission an audit of the last two financial years if none exists: this is the entry requirement for any process with a serious fund
- Identify and quantify tax and employment liabilities that will surface in the buyer’s due diligence, and decide which ones to resolve before the process
- Normalise EBITDA by stripping out personal expenses and adjusting the founder’s remuneration to market rates
- Formalise the management team (contracts, incentives) and document key processes to reduce founder dependency
- Engage an independent financial adviser with sector experience and PE transaction experience before starting the process
- Plan the tax treatment of the rollover with the tax adviser before signing any transaction document
