Early Stage

✏️ Usually investment bankers represent companies for sale

✏️ The bankers prepare a “teaser” — one-pager that gives you an overview of the business for sale

✏️ If the PE firm likes it, they’ll sign a NDA

✏️ Then, the investment bank sends the PE firm the CIM (or “deck” or “book” or “memo”)

✏️ The CIM is a full presentation (usually 50–100 pages) all about the business for sale

✏️ The PE firm will build a basic model (usually LBO) and perform some initial research

✏️ If all looks good, the PE firm will submit an IOI (“indication of interest”) to say they’re interested in learning more (usually has valuation range instead of one number)

✏️ If the investment bankers feel the IOI valuation is “within range,” they’ll continue the process with the PE firm

Mid Stage:

✏️ The PE firm does more diligence and eventually submits a document called a LOI (“letter of intent”) — this says “we like the deal enough to buy the company assuming all our diligence checks out” (this has an actual valuation, but the document is non-binding)

✏️ Then everyone agrees it’s time to meet

✏️ The bankers set up a meeting with the PE firm and the company so everyone can get to know each other (usually an onsite meeting) — business tour, Q&A, followed by more casual dinner/drinks in the evening

✏️ Then, the PE firm moves forward with formal diligence (huge process: modeling, industry research, customer research, background checks, accounting checks, process checks, everything).

✏️ A big part of this (for newer professionals) is building a model that shows lenders the deal is attractive enough to finance with debt (and the PE firm will bring equity)

Late Stage:

✏️ If all still looks good, it moves to the legal stage where lawyers trade drafts of the Purchase Agreement (either Asset or Stock purchase)

✏️ This agreement should mirror the terms in the LOI (or at least the latest understanding b/t everyone)

✏️ The PE firm keeps track of the business performance as the months go on (whole process takes ~3–9 months)

✏️ If the business continues to perform well, diligence continues smoothly, everyone likes each other, and everyone agrees on the legal stuff, then:

Closing:

✏️ The deal “closes.” This means the PE firm “calls capital” from its investors (equity), and lenders bring their “debt capital” as well

✏️ The money goes to the seller & pays the seller’s expenses, and from there the PE firm now owns the company, or at least a majority portion

✏️ Often times the new ownership will be 60% PE firm / 40% seller

✏️ They work together to grow the business (and buy other ones) over the next 3–7 years and eventually start the whole process over again and sell to someone else

📩p.s., If you liked this post, please consider subscribing to my free email course the Financial Modeling Educator, where I go in-depth on Financial Modeling for FP&A and Private Equity Professionals to help make you a better Financial Modeler.