What is the entire private equity deal process? Start to Finish?
Hey guys, I'm a third year associate and work in MM PE. I wanted to ask what you guys see as the entire deal process from start to finish.
I'm talking the nitty gritty, from teaser to NDA to funds flow. What does your firm do?
Based on the most helpful WSO content, here's a detailed breakdown of the private equity deal process from start to finish:
Teaser Creation and Distribution:
NDA (Non-Disclosure Agreement):
CIP (Confidential Information Presentation):
Pre-IOI Diligence:
Indication of Interest (IOI):
Management Presentations:
Data Room Access and Diligence:
Letter of Intent (LOI):
Final Due Diligence:
Negotiation of Definitive Agreements:
Financing and Lender Diligence:
Funds Flow and Closing:
This process can vary slightly depending on the firm, deal size, and market conditions, but these are the core steps involved. If you're looking for a comprehensive guide, the Private Equity Deals Process Course on WSO offers detailed lessons and real-world examples. You can check it out here: https://www.wallstreetoasis.com/forum/private-equity/just-released-priv…</a">Private Equity Deals Process Course.
Sources: Private Equity Deals Process Course - Just Released, Sellside / Buyside M&A Process "Checklist", Sell-Side M&A Overview, Lower Middle Market Private Equity is Paradise, https://www.wallstreetoasis.com/forum/investment-banking/breaking-into-private-equity-from-banking?customgpt=1
This is for a banker-led process; obviously
Received Teaser
- review internally on Monday's
- Negotiate NDAs through an automated NDA service
Receive CIM
- assign a deal team
- review internally and pull together general merits and risks
- if interest, call a few bankers and industry experts to understand valuation, industry dynamics, competitive landscape, and general margins
- talk to sell-side banker to understand valuation expectations, seller rollover desire, selling dynamics, etc.
- call some lenders and get leverage reads
- we may pull together some preliminary diligence, but not a ton
- build a preliminary model (super simple, with market assumptions and general margin assumptions based on similar deals in the space)
- do a one-page write up and present to IC for 5 minutes to determine if it's worth submitting an IOI
Submit IOI
- if there is interest, we submit IOI at a range that we're comfortable with. This isn't after a TON of work done before, but usually this is the market clearing price.
(NOTE: if we have a LOT of conviction around the space, a lot of the following due diligence items are done ahead of the below).
- Usually we structure the IOI depending on the seller dynamics, who we think is in the process, and what the capital market feedback has been
Pre-Management Presentation
- If our IOI is accepted we get access to the data room
- Start getting smart on the space:
- Junior associates will dig through and basically summarize every file. Review these.
- Pull together a more fulsome and fleshed out "What Really Matters" that informs what diligence items we need to be pursuing
- Pull together a management question list. This is a combination of unique deal questions and a framework we find helpful for every deal
- Attend MP, go to dinner, ask a bunch of questions (at dinner we get a real sense for the interpersonal dynamics of the sellers and management. This is when we decide whether or not we're going to be looking for a replacement management team)
We Like The Deal (Sprint to LOI)
- Assuming we get positive feedback from the bankers post-MP and positive feedback from the deal team, we push on ahead
- We pull together a 10-15 page presentation presenting to the IC what we've learned and asking for the go-ahead to spend real money to win the deal
- at this point, we may pull in QofE and Industry Diligence 3rd parties. Possibly others if we're sprinting
- tons of data room requests and uploads, mostly focused on business diligence
- Detailed financial model. This isn't as much even for projections as it is to understand how the financial algorithm of the business works in detail. Unit economics
- Get a term sheet from the lenders
- If a roll-up strategy, get the list of potential targets and begin preliminary conversations with some of them to gauge actionability
- meet with management/sellers one or two more times to make sure they're not crazy or inadequate. If we need management, start having convos with other CEOs.
- Create a 150+ page presentation of all of our findings
- We pull together an IC memo summarizing our findings to the IC with a point value and deal structure
- all while talking to bankers to make sure we're not wasting our time
- Determine equity vs asset vs F-Reorg. Figure out reps and warranties approach. Figure out escrows.
- Determine a preliminary calculation of "Adjusted EBITDA" to base the deal off of
- Present to IC, if we like it, we submit an LOI
Accepted LOI / Confirmatory Diligence -> winning the deal
- If we are accepted at this stage, we move to confirmatory diligence. We made a lot of "assumptions" in the last step to get to an LOI, so now we have to make sure those are correct
- bring in QofE (if not already), Tax, Legal, Industry, Insurance, Benefits, EHS, and IT 3rd parties to do their diligence\
- get the lenders what they need to get comfortable
- if we're looking for more equity, start getting co-investors what they need to invest on the deal
- manage banker and seller expectations through the entire process
- Determine first 100 day plan
- Determine management team and hiring gaps / needs
- Determine operational and strategy initiatives with other experts and identify the firms to run them
- Start negotiating the purchase agreement (ideally use K&E bc they respond fast and don't have lives)
- run around in circles making sure all stakeholders have what they need and are happy. This is what it means to be a "deal quarterback". Not for the faint of heart but also... not that interesting. This is a BIG reason why PE sucks. You spent so much time doing this and it's not related to whether or not it's a good investment. But it can be fun if interesting things come up (seller dynamics, bad business decisions, weird tax liabilities fraud)
- the goal of all of this is to identify the real EBITDA (that we're basing value off of), the growth plan, the real incremental ROI we will get, the on and off balance sheet liabilities (esp if equity deal), and the risks of future liability. You then want the purchase agreement to mitigate risk through reps & warranties / covenants, find all the off-balance sheet liabilities
- Disclosure schedules
- Credit agreements
- ancillary legal docs (employment agreements, subscription agreements, MSAs, etc.)
- hopefully everyone is happy
- pull together a funds flow (the massive list of wires that will effectuate the deal and pay everyone) and an estimated closing statement (that shows calculation from purchase price to how much the sellers will actually get)
- Finalize purchase agreement
- Iterate a bunch of times to make sure everything is considered
- closing call where the sellers bring up something last minute
- final closing call
- buy the company and people pat you on the back and have a drink with you. The partner says nice job.
- then you start it over again in two weeks bc the partners want to deploy more capital
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