Private Equity Transaction Timeline
Steps in a Private Equity M&A transaction
Steps in a Private Equity M&A transaction
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.
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 the financial highlights. The teaser doesn’t disclose the name of the seller at this point in time, as the objective is to keep the seller’s identity confidential.
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 the Non-Disclosure Agreement (NDA). The NDA restricts the use of confidential information that will be part of CIM to solicit clients, poach employees or develop business strategies around it.
Once the NDA is exchanged between the seller and potential acquirer, the bankers share the complete piece of information about the company, including disclosing the identity of the company. The Confidential Information Memorandum contains the investment thesis for the company, overview of the market and the company, products and service offerings, revenue profile, employee profile, financials (historical and projections and structure of the management). The idea of the CIM is that the potential acquirer can look at the company from all perspectives and then decide whether they would be willing to buy and if yes, for how much.
As and when the PE players start looking at CIM, there 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 all such doubts, the PE’s senior management gets into a call with the management team of the seller company. The PE team is also keen to understand the broad objectives of the seller.
The company, based on the financials received in CIM and based on their own projections about the seller 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 very imperative as the PE must quote valuation to move ahead in the process.
Expression of Interest is a formal offer indicating a serious interest from the PE firm / potential buyer about the interest of the company to acquire 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 mentions that the offer is non-binding for both the parties.
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, organization structure, marketing plan, employee details, etc. The idea is that the buyer verifies the completeness, accuracy, and capabilities of the company by doing a proper due diligence.
As the next step, senior management from both sides meet in person to discuss the potential synergy benefits they can bring in together, the roles they would be involved in post-transaction, etc. They also discuss broad points about the due diligence in this meeting.
A Letter of Intent is a document wherein major points of the share purchase agreements (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 and APA is very time consuming and expensive affair, so with the LOI, the idea is to make the seller ready for broad items.
One of the important steps in the private equity transaction timeline is the Exclusivity Period and Final Due Diligence. During this period, the potential buyer asks for exclusivity from the bankers wherein the banker, after discussions with the seller, choose one of the buyers for an exclusive discussion and close the due diligence process.
The quality of earnings report is prepared by an independent third-party firm wherein analysis is done on the breakdown of revenue – such as product and service mix, geography mix, customer mix, etc. Various analysis of cost is also done to understand the current trend and future projections. Cost is measured such as fixed or variable cost, recurring or one-timer cost, etc. The objective is to assess the true quality of the business and accuracy of historical financials.
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 the terms and conditions such as asset purchased, purchase consideration, representations and warranties, closing conditions, etc. The role of the banker is to make sure both the parties reach a mutual consent and close the deal.
Once the shareholder’s agreement is drafted, other contracts and annexures are also drafted to make part of the final agreement.
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