Private Equity Transaction Timeline
August 30, 2024
What Is A Private Equity Transaction Timeline?
During the acquisition process, a Private Equity fund enters into a range of contractual agreements that govern each party’s rights and obligations at specific points in the investment process. While documents may vary (based on jurisdiction, deal type, and language) there is usually a set of essential agreements similar to those found in most mature company acquisition processes. Aided by legal advisors, these documents are produced at specific stages during the timeline.
Key Learning Points
- A PE transaction involves several steps, each with its own purpose and significance in the overall transaction
- These are typically (in order): deal sourcing, preliminary due diligence, sending a non-binding Letter of Intent (LOI), formal due diligence, sending a firm offer letter, negotiation and documentation, and finally the closing period
- Throughout the PE transaction process, formal contractual agreements are entered into which govern each party’s rights and obligations
- These include Non-Disclosure Agreements (NDAs), Letters of Intent (LOIs), Exclusive Agreements (EAs), Sale and Purchase Agreements (SPAs), and Shareholders Agreements (SHAs)
- Due diligence is a critical part of the PE transaction process to ensure a successful transaction. It involves initial investigative work on potential investments (preliminary due diligence) and more detailed investigation once the terms of the LOI are accepted (formal due diligence)
- The timeline for these documents will be dependent on the availability of the necessary information and then determined by the ongoing discussions
Steps in a Private Equity Transaction Timeline
Following the protocol of steps in a financial transaction enables all parties in a deal to participate as fairly and swiftly as possible.
This demonstrates the typical PE transaction timetable. Each of the steps involves various documents that govern each party’s rights and obligations at specific points in the investment process. The speed of the process will depend on the availability and free flow of information between the company and the PE fund.
The document process is managed by the PE firm’s investment team, who also decide to what extent it requires professional legal advice. Obviously, there will be variances driven by jurisdiction, deal type, and language, but this timeline is a good guide to how a deal negotiation is taken to completion. Some documents, such as NDAs and LOIs, are based on the templates that exist within PE firms which are then modified on a deal-by-deal basis.
What is Deal Sourcing?
This is in the initial screening process within a PE firm where it searches for potential opportunities that fit its desired investment criteria. During this stage, if any potential investment opportunities arise, a non-disclosure agreement (NDA) is signed to allow for confidential information sharing between the company and the PE firm. This allows the PE firm to access performance data and more detailed financials within the company. It is on the strict understanding that any information will not be disclosed, or place either party at a disadvantage should the deal not take place.
Non- disclosure Agreement (NDA)
An NDA, or Non-Disclosure Agreement, is a legal contract entered into by the Private Equity fund and a target company at the beginning of any due diligence process. The purpose of an NDA is to exchange confidential information and agree to keep the fact that discussions relating to a transaction are ongoing and confidential. The NDA places an obligation on both parties to refrain from sharing privileged information with external parties after signing. This obligation does not apply to information that becomes publicly available through no fault of the parties. The NDA covers confidential information shared through the due diligence process, negotiation, and closing processes. It usually continues to apply even if the business is not acquired.
When does Preliminary Due Diligence begin?
The early investigative work on potential investments is conducted during preliminary due diligence. Once an NDA is signed, the potentially investing PE firm will have access to confidential information within the target company. This allows for deeper analysis of business performance and growth prospects, as well as comparison with any similar sized companies or those operating within the sector.
Letter of Intent (LOI)
A non-binding LOI is sent to business owners after preliminary due diligence indicates a deal may be viable. This letter formally introduces the buyer, provides the key reasons for interest, it suggests a pathway forward, and sometimes provides valuation details. An LOI sets out key economic and procedural terms that form the basis of further negotiations in a buyout process. It usually includes the dollar amount of the PE fund’s bid, sources of funding and the envisioned transaction structure. It may also detail the strategic plan that the PE firm has for the business as well as the economic plan for the remaining management team. These economic provisions are non-binding and are seen as a good faith representation of a fund’s intent and an initial indication of the terms to be included in a sale and purchase agreement.
Formal Due Diligence and Valuation process
If the terms of the LOI are accepted, the owners allow for further detailed due diligence. At this point, one of the key focuses will be on determining a valuation of the company (particularly if unlisted) and an appropriate investment offer.
Firm Offer Letter
After successful formal due diligence, a Firm Offer Letter may be sent by the bidder. This letter reiterates the buyer’s interest, reasons for the interest, due diligence findings, expenses incurred to date, future strategy and ownership plans, and a legal commitment to pay a certain price based on final due diligence. A mutually signed firm bid letter can allow parties to initiate regulatory and government approval processes for the transaction. It specifically allows a PE fund to credibly approach banks and other capital providers to seek transaction financing. An exclusivity provision or agreement, which grants the PE fund the sole right to purchase the business for a specific time period, is often included in the final and firm bid. This legal document stipulates what compensation the PE firm would get if the seller does not adhere to exclusivity terms.
Exclusive Agreement (EA)
The bidder often requests a period of exclusivity at this point, during which the vendor is legally restricted from entering into discussions with another bidder. The bidder can perform any confirmatory due diligence during this period.
Negotiations and Documentation for final stages of a PE timeline
The final stage of acquisition discussions is where the terms of the deal are negotiated and documented. These are captured in a Sale and Purchase Agreement (SPA), supported by funding documentation, commitment letters, and debt term sheets. If there are multiple parties involved, a Shareholders Agreement (SHA) is also created.
Sale and Purchase Agreement (SPA)
This document is a legally binding agreement between the two parties (buyer and seller) to complete the sale (or partial sale) of a business or product. It is important as it details the price agreed to be paid, the payment terms and also any other conditions or due diligence which need to be met to enable the transaction to take place.
Closing Period within a PE timeline
Once the SPA is completed and signed, there is a closing period during which equity and debt execution and administrative documentation are processed to allow for final funding.
Conclusion
A Private Equity (PE) transaction timeline is a complex process involving several key steps and a range of contractual agreements. Each step, from deal sourcing to the closing period, has its own purpose and significance, and involves various documents that govern each party’s rights and obligations. The PE firm’s investment team manages these document processes, often with the help of legal advisors. Understanding this timeline and the associated documents, such as Non-Disclosure Agreements (NDAs), Letters of Intent (LOIs), Exclusive Agreements (EAs), Sale and Purchase Agreements (SPAs), and Shareholders Agreements (SHAs), is crucial for navigating a PE transaction successfully.