The Private Equity Deal Process, Teaser to Signing

Sourcing, which decides more than it appears to

Deals arrive in three ways and they are not equally good. Banker-led auctions are the most common and the most competitive, which means the price is efficient and the edge must come from elsewhere. Proprietary deals come from a relationship with a founder or a management team and are the reason funds put associates on origination calls for years. Bolt-on acquisitions arrive through an existing portfolio company, which is the quietest and often the best route because the buyer already knows the market.

Funds review hundreds of opportunities to complete a handful. A mid-market fund might see a thousand teasers a year, seriously look at a hundred, bid on twenty and close four. Every part of the process below is a filter, and the earlier filters are cheap on purpose.

The sequence

What the two bids are actually for

The indicative offer is a filter and a positioning exercise. It is non-binding, it states a range, and it lists the assumptions the range depends on. Bid too low and you are out of the process; bid unrealistically high to buy a seat and you will have to retrade later, which damages the relationship with the banker running it and costs you on the next deal.

The binding offer is where the deal is won. It is a price, a financing commitment and a marked-up purchase agreement, and sellers weigh all three. A slightly lower price with a clean contract, no financing condition and a credible timetable often beats a higher one with conditions attached. Understanding that deal certainty is part of the price is one of the clearest signals of commercial maturity in an interview.

Diligence, workstream by workstream

The associate coordinates advisers, reads their reports and translates the findings into the model and the price. This is most of the job during a live deal.

• Commercial due diligence: a consulting firm tests the market size, growth, competitive position and the customer relationships. The output feeds the revenue forecast.
• Financial due diligence: an accounting firm produces a quality of earnings report, normalising EBITDA, testing working capital and identifying net debt items. This report moves the price more often than any other.
• Legal due diligence: contracts, change of control provisions, litigation, employment, property and intellectual property.
• Tax structuring: the acquisition structure, interest deductibility and the exit route, decided early because it is expensive to change late.
• Technology, ESG, insurance and, increasingly, cyber. Specialist workstreams that occasionally kill a deal on their own.
• Management diligence: referencing the team, and deciding who stays. The fund is buying the people as much as the business.

Financing, and why it runs in parallel

The debt package is arranged while diligence is underway, because a binding bid needs committed financing behind it. The fund runs a lender process much as the seller runs an auction: banks and private credit funds receive the same information memorandum and quality of earnings report and quote terms.

What is negotiated is not only the rate. It is the quantum relative to EBITDA, the amortisation profile, the covenant package and its headroom, the permitted acquisitions basket for a buy-and-build, and the terms on which further debt can be raised later. A covenant-light package with a generous basket is worth paying for if the plan involves acquisitions.

The purchase agreement, in the terms that matter

• Locked box versus completion accounts: whether the price is fixed at a historic balance sheet date with cash accruing to the buyer, or trued up after closing. Locked box is now standard in Europe and increasingly elsewhere.
• Net debt and normalised working capital: the two adjustments between enterprise value and the cash actually paid, and the most common source of late argument.
• Warranties and indemnities, usually now backed by insurance, which lets a seller walk away cleanly and a buyer still have recourse.
• Conditions precedent: antitrust and regulatory clearances, and foreign investment approvals, which are the reason signing and completion can be months apart.
• Management rollover and the incentive plan: how much of their proceeds the team reinvests and what they earn on exit. A team that rolls a meaningful amount is giving you information.

What an associate is doing at each stage

In the first two weeks, reading and building. The first model is deliberately quick: enough to know whether a price in the indicated range can clear the return threshold, not a finished article.

Through diligence, coordinating. Adviser calls, tracking open questions, updating the model as findings land, and writing the investment committee paper, which is the document the deal is actually decided on and the piece of work most worth doing well.

In the final weeks, in the detail. Reconciling the quality of earnings adjustments into the price, working through the net debt list line by line, and being the person who knows where every number came from when a partner asks at eleven at night.