The first step, as you might imagine, is to identify the business you wish to acquire. This is often referred to as “sourcing,” and can be enormously time consuming. Sourcing requires attending industry conferences and networking with investment bankers and other professionals involved in advising on transactions including law firms and accounting practices.
On occasion you will get lucky, and find yourself talking to a successful entrepreneur interested in selling his business to your firm directly (i.e. without a process). In such a situation you can skip to item 5 in the list that follows. More frequently, however, you will meet an investment banker that has secured the right to represent a business for sale.
To manage all of the activity surrounding this process, most private equity firms will establish a pipeline report, and hold weekly pipeline meetings. The process, and what you will see in the pipeline report, can be outlined as follows:
- Teaser: Receive what is known as a “teaser” outlining the transaction in a one or two page document, and execute a Confidentiality Agreement (CA) so that the intermediary can provide more detailed data.
- Confidential Information Memorandum (CIM): Receive business memorandum from intermediary (often an investment bank). This is generally a 50 to 100+ page deck.
- Indication of Interest (IOI): Evaluate the information received, and submit an IOI, which states valuation range at which you would be interested proceeding.
- Wait to hear back from Sellers – this could take a month.
- Letter of Intent (LOI): If you are invited to move forward at the range provided, work towards submitting a LOI. A LOI is basically an IOI with a lot more detail. Valuation range will be reduced to the precise value at which you are interested, and you will be asked to include information about capital structure, employment agreements, non-compete, high-level representations and warranties, among others things. Download example.
- Lender Engagement: In some transactions you will be required to submit lender term sheets with your LOI. The term sheets include details such as the amount of the loan (facility size), the term of the loan (maturity), the rate at which the loan would be repaid (amortization), and interest due. With respect to the latter, this can be both current interest (cash interest), and / or PIK interest (Payment In Kind).
- Exclusivity Period: If the LOI is executed by the Sellers you have an exclusivity period to close the transaction.
If you are selected (LOI executed) you generally have 30 to 120 days (the “exclusivity period”) to close the transaction. You now have to work through a substantial amount of documentation, and at any time throughout this entire process the deal can fall apart for reasons outside of your control. And once the transaction has closed, if you are a control investor, the work has just begun.
Please see the LBO Case Study for more detail on this process.