Who doesn’t love an epic adventure story?  Whether it’s the Lord of the Rings or Frozen (admit it, you love that movie), watching a person overcome the odds is exciting.  I get that same feeling during private equity processes, and I realized it’s because these processes mirror the formula for an epic adventure.  The entrepreneur is the hero who embarks on a long process to find an investor.  He or she assembles a team of experts, and together they deal with private equity requests and negotiations.  At the end of the process, the entrepreneur receives capital, and everyone lives happily ever after, hopefully.

Okay, the epic adventure comparison may be a bit of a stretch.  However, any entrepreneur who has raised capital will tell you that a private equity process can be long and taxing, but there is a lucrative financial reward at the end.  We created this post to help you better understand the private equity process.  Over time, we will add links to relevant sourcing of detailed information pertaining to each of these topics.

What is a private equity process?

A private equity process is another word for an investment process.  It is a series of steps that allow a private equity firm to find, analyze and negotiate deals efficiently.  While no private equity process is identical, they all follow a similar path, as outlined below.

What are the stages of a private equity process?

  1. Deal Origination:  Deal origination is the start of the process and is the method by which private equity firms find investment opportunities.  There are two deal origination models. The first is proprietary sourcing, where a private equity firm cold calls business owners.  The second model is auctions, which are run by M&A advisors.  M&A advisors help business owners sell their companies and are hired to create a competitive auction between multiple private equity firms. These advisors are called investment banks or business brokers.
  2. Introduction:  Introductory calls private an overview of the business.  Private equity firms usually sign a Non-Disclosure Agreement (“NDA”) before any sensitive information is shared.  If the entrepreneur hires an M&A advisor, the M&A advisor will create summary materials about the business to distribute to private equity firms.  These materials are called confidential information memorandums (“CIMs”) or investor pitch decks and provide potential investors with a consolidated view of the business.
  3. Screening:  Every private equity firm has a set of investment criteria that they use to screen potential investments.  This step allows a private equity firm to determine whether or not a company fits their criteria and could be an attractive private equity investment.  Screening is also beneficial to entrepreneurs because they don’t waste time on investors who won’t ultimately put in an offer.  Screening is the first time a deal will go through investment committee, which is a group of individuals who are responsible for investment decisions.   Most firms have multi-step investment committee processes.
  4. Light Due Diligence:  If a company fits within a private equity firm’s investment criteria, the private equity firm will request a small amount of information to validate the company’s financials and operations.
  5. Indication of Interest:  After light diligence, a private equity firm should have enough information to submit a preliminary offer or indication of interest to an entrepreneur.  This indication of interest is not binding and is dependent on successfully completing full diligence.
  6. Letter of Intent:  A letter of intent (“LOI”) is a document that outlines all the key terms of the deal.  It outlines valuation, investment amount, deal structure and other key terms.  Entrepreneurs should always hire a lawyer who specializes in mergers and acquisitions to help them understand the implications of deal terms.  All the key deal terms should be negotiated on the front end before a letter of intent is signed.  Investment committee approval is required to submit a letter of intent.
  7. Full Due Diligence:  Private equity firms have an obligation to their shareholders to make informed investment decisions. To do that, a private equity firm analyzes every aspect of a business.  Proper due diligence requires a series of meetings and calls with the entrepreneur and key management.  The private equity firm typically submits a diligence request list to the entrepreneur.  Some diligence request lists are hundreds of items long and require meaningful man hours to collect and share the requested information.
  8. Purchase Agreement Negotiation:  To invest in a company, a purchase agreement is created, which outlines all the provisions of the transaction and how the business will run.  Each and every word in the purchase agreement should be scrutinized and negotiated to protect investors and the entrepreneur.  Final investment committee approval is required once all the deal terms are negotiated.
  9. Deal Closing:  Deal closing is when the purchase documents are signed, and the investment funds are transferred to the entrepreneur’s account.
  10. Kick-off:  Most private equity firms have a kick-off process, which is intended to start the relationship off on the right foot.  During kick-off processes the private equity firm will be introduced to the broader team, reporting requirements are introduced, a growth plan is outlined, and potential changes to the business are decided upon.
  11. Monitoring:  Private equity firms have reporting requirements in order to make sure their investments are going well.  Entrepreneurs share financial and operational information and the private equity firm will usually require a seat on the board.
  12. Exit / Return:  Private equity firms make money only when there is a successful exit or recapitalization of the company.  Private equity firms prepare for exit well in advance to make sure the business is best positioned for an attractive sale.

How Long Does a Private Equity Process Last?

Private equity processes take an average of four to six months from start to finish.  This timeline can be accelerated or take longer depending on the needs of the company and how timely information and diligence can be wrapped up.

Why Would A Business Owner Go Through a Private Equity Process?

If you made it to this section, you might be thinking, “Who in their right mind would ever willingly go through a private equity process?”  Raising capital is never an easy or short task.  It takes time, resources and can be a huge distraction for your business.  Like any epic adventure, though, there is a great reward at the end of the process.  For many brave entrepreneurs, the financial freedom and growth capital make it worthwhile.  If you aren’t sure whether private equity is a fit for your business, check out this article.

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