Private Equity Transaction Timeline

It includes the various steps involved in an end-to-end buy-side transaction.

The private equity transaction timeline includes the various steps in an end-to-end buy-side transaction. Also known as a buy-side M&A deal, a private equity deal flows through each step to protect the fund and its shareholders.

The private equity transaction timeline can be broken down into three distinct activity types:

  1. Marketing
  2. Valuation and due diligence
  3. Negotiations and closing

Each activity contains steps that should be completed before moving on to the next activity.

In marketing activities, teasers are sent out by investment banks in search of buyers for a firm. Alternatively, some PE firms contact businesses in their industries and may attempt to source their deals.

Next, they will sign NDAs to ensure discreteness during the transaction. They will also receive preliminary information to decide if they are interested in further analyzing the company.

The valuation and due diligence portions have the most individual stages. Calls between the acquiree and acquirer, financial modeling and valuation, several rounds of due diligence, and an initial offer are made in this stage.

Finally, legal documents are drawn up and signed in negotiations and closing, a final value calculated, an offer made, and all closing conditions are agreed upon to close the deal.

Let's dive deeper into each of these individually to help gain a better understanding of the deal process.

Marketing

In the marketing stage, the initial exchange of information takes place. As in marketing, the point is not only to gain some interest in an offering but to offer just enough preliminary info to entice the target market to ask for more.

1. ​Receiving a teaser/sourcing a deal

One way that a deal may be initiated is by an investment bank. An investment bank may have been contacted about selling a business and will then send out "teasers." For example, company XYZ's owners want to sell, so they contact Morgan Stanley to help them find a buyer.

Investment banks create teasers. When a teaser is sent out, the investment bank contacts private equity firms with the basics of the business, including: 

  • Business description
  • Product and/or service offerings
  • High-level financial information

The investment banks will send out a teaser for a private business for sale or an opportunity to make a private investment. The important part is that no name or information that would make the business identifiable is provided so that the opportunity remains confidential.

Another way a deal may begin is by sourcing a deal. Some PE firms have a deal origination team that sources deals through various methods such as cold calling. Once they have found a business willing to consider selling, the process will continue.

2. Signing the NDA

If, after reading the teaser, the private equity firms are interested in the prospective company, they will move on to signing a non-disclosure agreement. NDAs are some of the first documents sent between prospective buyers and sellers. 

The NDAs purpose is to prevent the use of the confidential information memorandum or other confidential information for one of the following restricted uses:

  • Soliciting clients
  • Poaching employees
  • Integrating information into business strategies

Signing the NDA is the "all clear" to exchange some sensitive information while having the confidence that both parties know not to share this information with unauthorized third parties.

3. The PE firm receives CIM

The CIM is the confidential information memorandum. This package is sent from the investment bank and includes:

  • Investment thesis
  • Financials
  • Projections
  • Capital structure
  • Market and company overview
  • Offerings (products and/or services)
  • Revenue profile
  • Employee profiles

With this information provided, the private equity firm can make a more informed decision on whether to continue considering the deal. Due diligence and valuation cost a lot of time and money, so PE firms are looking to ensure this prospect is worth considering.

Valuation and due diligence

This is where most of the leg work for the private equity firm lies. There is a combined need to perform due diligence and valuation.

PE firms must make sure everything is true as represented and clear up confusion while verifying details. They must also create value for the business to pitch to the investment committee and offer to the sellers.

1. Call between the PE firm and the target firm's management

When making an acquisition, many firms believe it is vital to not just look at the financials. There is important qualitative information, and buy-side teams often need clarification when evaluating a company's potential value.

The firm may seek to understand any of the following:

  • Management capabilities
  • Business Capabilities
  • Internal financial goals and projections
  • NPS (net promoter score) or other customer relationship data
  • Clarification of any concerns within the CIM

This is also an opportunity to get to know the seller, why they want to sell, and what they hope to achieve in selling their business. At this point, the PE team may also be exploring financing options available and asking the investment bankers for their perspectives.

2. Financial modeling and valuation analysis

Now that the private equity players have had a chance to review the CIM package, clarify information when needed, and understand more about the business, they will start to do an initial analysis of the company. There are a few ways in which to analyze the company, including:

  1.  DCF (discounted cash flows) model
  2. Analyzing comparables of similar companies
  3. Using precedent transaction valuations
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3. Forming the investment proposal

The process may differ from one PE shop to another, but this step often involves a meeting with the firm's investment committee. They may create an expense budget to aid with getting through the deal, but most often, the purpose is to seek approval for the first-round bid.

Some costs for lawyers and consultants may be added to the budget needed to close the deal. The help of these consultants and lawyers is needed most in the final stages of due diligence. 

4. Non-binding offer / first-round bid

Once the firm has decided they are interested in acquiring the target, it will move on to the expression of interest (EOI) and a non-binding or "first round" bid. The acquirer writes this to the target firm to express serious interest in the business. 

This is one of the initial transaction documents exchanged between businesses. The key aspects of these documents are:

  • Valuation (often including price range)
  • Post-acquisition capital structure
  • PE firm's background
  • The value creation strategy
  • The credibility of the offer
  • Compatibility of PE shop and target management
  • Requirements of due diligence
  • Required transition support
  • Structure of the transaction
  • Set all approvals for final sign-off

The EOI will clearly state that the offer is non-binding.

5. PE firm granted access to the data room.

The data exchange must be considered a complex and sensitive deal. Due to the volume of data and the need for it to be easily accessed, data rooms are a great place to satisfy these needs regarding data exchange.

Once the bankers select a bid to consider, the data room is open to the PE firm. A virtual data room such as those offered by the deal room is opened to exchange important data. Information that may need to be exchanged includes:

  • Business' legal and organizational entities
  • Operation records
  • Board meeting reports
  • Property agreements
  • Intellectual property-related documents
  • All necessary or requested financial data
  • Employment details and agreements
  • Marketing plans

This access is necessary for additional due diligence on the part of the private equity team. At this point, they can take a deep dive and narrow down some of the details regarding valuation. The team can also more easily identify potential future concerns for the target firm.

6. An operating model is created.

This detailed breakdown of revenue and the costs associated with earning that revenue. This model observes the drivers and assumptions of the business and its future performance, such as:

  • Raw materials costs
  • Business volume
  • Pricing of goods and services
  • Customer volume and renewal/returning customer rates
  • Cost structure (including variable and fixed breakdowns)

Many of the above factors will likely see fluctuations over a year. Therefore, refining drivers and assumptions can lead to more accurate projections and models.

7. In-person meeting with the target firm's management

As there are many benefits to acquisitions, it is beneficial for the senior managers of both parties to meet and discuss what these might be. 

These benefits are called business synergies, which could include improved pricing power, buying power, shared technology and information, and reduced competition in some cases. 

This is also a good opportunity to gain a deeper understanding of the management team, their goals, and plans to meet these goals.

8. Preliminary investment memorandum

This is a large document, similar to a business plan but instead focusing on an investment opportunity. The preliminary investment memorandum (PIM) is comprised of the following:

  1. Executive summary - transaction details and investment thesis
  2. Company overview - encompassing description of the target business
  3. Market & industry overview - market trends and high-level analysis
  4. Financial overview - three statements, history, and projections
  5. Valuation - LBO, DCF, and/or other related models and metrics
  6. Risk analysis - risks identified from the due diligence completed thus far.
  7. Exit details - as firms still need to consider their exits, they should disclose them to the management team at the target firm.
  8. Proposed project plan - recommendations are then provided to the PE investment committee based on budget and valuation range.

Up until this point is considered the initial due diligence of the deal. But further considerations such as legal and due diligence still need to be completed, which will follow.

9. Letter of intent

If all has gone well and both parties are satisfied with the information they have received thus far, now is the time for the private equity firm to express its intent to acquire in a formal letter.

This is submitted to the target firm to highlight some of the conditions or warranties of the agreement. By this stage, the sellers and buyers have invested considerable time in the deal. 

Assuming they are both still interested in transacting, buyers and sellers aim to come to broad terms in the purchase agreement. The LOI indicates that the PE firm is interested in making a deal and what the terms of the transaction might be.

10. Final due diligence and exclusivity period

There are many moving parts at this stage, and the teams are working hard to close the deal. PE firms will work with legal and deal advisory teams to ensure that everything goes through smoothly. 

It is common to contact the target's management frequently, potentially daily, by this point. Most teams will even have to sideline other deals at this stage, or pass deals off, to ensure everything can be done properly, within a reasonable timeline, and with enough care. 

The point of this stage is not only to ensure that the deal can be completed but to take a deep dive into some non-financial elements of the business. The private equity team may wish to:

  • Visit the business
  • Talk and meet with non-executive management and sales staff
  • Talk to customers and suppliers of the business

This period also overlaps with the exclusivity period. If a deal is found through a teaser, the PE firm will ask for some exclusivity to further discuss the transaction. As the PE team will be setting aside extra time to close the deal, exclusivity ensures their time & money are not wasted.

Negotiations and Closing

For negotiation and closing:

1. Quality of earnings report

In this stage, a third party will act as an extra set of eyes. Their job is to analyze the various elements of the income statements, including categorizing expenses. 

The third party wants to know if the earnings are one-time or regular, fixed or variable, and to what extent they might be expected to continue. Understanding this will help understand the quality of the top and bottom line, revenue, and earnings.

2. Final approval from the investment committee

Once all the final stages of due diligence are completed, and if the PE firm wants to complete the deal, a final investment memorandum (FIM) is created. The FIM will highlight new information concerns, and a final valuation will be used in the final, binding bid.

3. Final, binding offer

If the investment committee approves the FIM, the PE shop will proceed with the deal by submitting its final bid. They will also include the financing discussed with the investment bank.

Once the target firm has received the bid, it will be considered and either accepted or rejected. If the offer is accepted, then some of the closing documents will be brought to the lawyers.

It may take 3-6 weeks to get from the first bid to the final one, but this all depends on various factors of the deal.

4. Purchase agreements

If the quality of earnings does not uncover anything unexpected and the earnings are of acceptable quality, that means moving on to approval and a final, binding offer. Once (or if) this is accepted, purchase agreements must now be drafted and signed.

One of the final stages involves the purchase agreements (or merger agreements, depending on the transaction type). A purchase of just the assets requires an asset purchase agreement, but a share purchase agreement must be signed in complete company acquisition.

These contracts bind both the seller and acquirer to the deal's conditions. The lawyers' job at this point is to ensure the legal requirements are fulfilled for such a contract (for example, consideration for both parties).

The final stages

As all transactions face different challenges, there may be various final steps to close a deal. Much of what is required at this stage are legal and administrative tasks. There is now also the task of onboarding any new employees if needed.

A final agreement will be drafted and signed with all the necessary due diligence, conditions, warranties, valuation, price of purchase, etc. 

What comes next is referred to as the investment cycle. This is the time when the company is held in the portfolio. The goal is to earn the required ROI on the business by working with the company and its management to improve cash flows and operational efficiency.

Many companies are evaluated at the top end of the sourcing funnel, but very few companies typically make it to the end. 

There are potentially thousands of companies forwarded or contacted by the fund in a year. But many get rejected by the investment committee or don't meet the fund's investment criteria.

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Researched and authored by Brandon Fausto | LinkedIn

Edited by Colt DiGiovanni | LinkedIn

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