There are various steps involved in a Private Equity Transaction Timeline. The diagram below shows the different steps in a M&A transaction from the private equity side, along with a tentative timeline.
Steps in a Private Equity Transaction Timeline
1. Teaser Sent by Bankers
One of the first steps of buy-side M&A (in a private equity transaction timeline) is when the bankers send teasers to the Private Equity players. Teasers are documents that contains a brief description of the business, its product and service offerings, and financial highlights. It’s called a “teaser” because it doesn’t disclose the name of the seller at this point in time, as the objective is to keep the seller’s identity confidential in the beginning.
2. NDA Signed
Once the teaser is seen by the PE players and they decide to explore the opportunity, the next step in the transaction timeline is the signing of a Non-Disclosure Agreement (NDA). The NDA restricts the use of confidential information that will be part of the CIM from being used to solicit clients, poach employees, or develop business strategies around it.
3. CIM Sent by Bankers
Once the NDA is exchanged between the seller and the potential acquirer, the bankers share the complete information about the company, including disclosing the identity of the company. The Confidential Information Memorandum contains the investment thesis for the company, an overview of the market and the company, products and service offerings, a revenue profile, employee profile, and financials (historical, projections, and capital structure). The idea of the CIM is that the potential acquirer can look at the company from all perspectives and then decide whether they are willing to buy it and, if so, for how much.
4. Calls with Management Team
When the PE players start looking at the CIM, there usually comes a situation where they require certain clarifications about the company’s capabilities, the relevance of their financial projections, relationship with customers, etc. To clarify such issues, the PE firm’s senior management gets into a call with the management team of the seller. The PE team is also keen to understand the broad objectives of the seller.
5. Financial Model and Valuation
The acquiring company, based on the financials received in the CIM and based on their own projections about the target company, performs a valuation. The valuation is done based on Discounted Cash Flow (DCF) modeling and looking at the trading and transaction comparables. The valuation becomes critical, as the PE firm must quote valuation to move ahead in the process.
6. Expression of Interest / Non-Binding Offer
The Expression of Interest is a formal offer indicating a serious interest from the PE firm / potential buyer. The EOI expresses the interest of the PE firm in acquiring the business of the seller by paying a certain valuation. The EOI includes the valuation that the company is offering, requirements of due diligence, the type of transition support they would require, the transaction structure, and the approvals needed for the final sign-off. It clearly notes that the offer is non-binding for both the parties.
7. Data Room Access Granted
Once the bid is selected by the bankers, they open the data room for the potential acquirers. The data room is a virtual data room for exchanging and storing data of any type, including financials, legal transactions, organizational structure, marketing plan, employee details, etc. The idea is that the buyer verifies the completeness, accuracy, and capabilities of the company by doing proper due diligence.
8. In-Person Meeting with Management
As the next step in the private equity transaction timeline, senior management from both sides meet in person to discuss the potential synergy benefits they can bring together, the roles they would be involved in post-transaction, etc. They also discuss broad points about the due diligence in this meeting.
9. Letter of Intent
A Letter of Intent is a document wherein major points of the share purchase agreement (SPA) are highlighted by the buyer to the seller. The overall idea is to give a broad understanding of the representations and warranties the buyer is looking for. Drafting the SPA is a time consuming and expensive affair, so with the LOI, the idea is to make the seller ready for broad terms.
10. Exclusivity Period and Final Due Diligence
One of the most important steps in the private equity transaction timeline is the Exclusivity Period and Final Due Diligence. During this period, the potential buyers ask for exclusivity from the investment bankers. The bankers, after discussions with the seller, choose one of the buyers for an exclusive discussion and close out the due diligence process.
11. Quality of Earnings Report
The quality of earnings report is prepared by an independent third-party firm. Analysis is done on the breakdown of revenue – such as product and service mix, geographical mix, customer mix, etc. Various analyses of costs are also done to understand the current trend and future projections. Costs are recognized as fixed or variable costs, recurring or one-time costs, etc. The objective is to assess the true quality of the business and the accuracy of historical financials.
12. Definitive Agreements: SPA / APA
The Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA) are legal documents that record the terms and conditions between two companies that enter into an agreement for a merger, acquisition, divestiture, joint venture, or some sort of strategic alliance. It is a mutually binding contract between the buyer and seller and includes terms and conditions such as assets purchased, purchase consideration, representations and warranties, and closing conditions. The role of the investment banker in this part of the private equity transaction timeline is to make sure both parties reach a mutual accord and close the deal.
13. Shareholders’ Agreement and Other Agreements
Once the shareholders’ agreement is drafted, other contracts and annexures are also drafted to become part of the final agreement.
Thank you for reading CFI’s guide to the Private Equity Transaction Time. To further advance your financial education, the following CFI resources will be helpful: