A private equity transaction it’s an investment made by a private capital fund, its sponsor, or other institutional investors in non-public securities of a private or public company. These transactions are quite difficult, and their successful completion requires knowledge of the jurisdiction, taxes, and current state of the private equity market. Private equity transactions are concluded in special transaction rooms and remain closed to the public.
In this article, you will find information about the structure of transactions, key documents, and tips for the successful completion of transactions.
Structure of the private equity transaction
There are some of the most important components of the private equity transaction structure.
- Source search.
The private equity transaction starts with a so-called source search. Such sources include research, internal analysis, networking, business meetings, conferences, etc. It helps to detect and assess investment opportunities.
- Deal description.
The financial representative sends a small statement about the company put up for sale or the possibility of investing in private capital. It doesn’t specify the name of the seller, only a brief description of the business and services, and also the main financial indicators.
- Privacy Agreement.
If the investor is interested in the company’s prospects, a Non-Disclosure Agreement is signed. In this way, the company’s management provides the investor with confidential business information. At this stage, the company receives enough information to make an investment decision.
- Investment memorandum.
A document that describes opportunities for an investment committee. It consists of a company review, an activity market review, a financial review, and a risk review.
- Final audit and approval by the investment committee.
After approval of the previous documents, the team devotes all attention to the final inspection. At this stage, requests are sent to resolve all outstanding issues.
After that, the company submits the final memorandum. If it’s approved, the company sends investors a final offer. It specifies the final purchase prices and presents the financial documents of banks.
- Signing a deal.
After the successful completion of all previous stages, the deal comes to its logical conclusion.
Key documents and helpful tips
In order for the deal to be as comfortable and successful as possible, the company needs to collect all the necessary documents. Most often, this list includes:
- Stock Purchase Agreement
- Investment Agreement
- Service contracts
- Debt documents
- Insurance policies
The availability of all the necessary documents does not guarantee the 100% success of the transaction. There are many other components, that will help you get closer to a successful private equity transaction. Here are several tips.
- Good preparation. You should be well aware of the seller, business plan, and forecasts.
- Understanding the risks. Before completing a deal, you need to find out possible potential problems and ways to solve them.
- The right business plan will help to earn the trust of investors and convince them of the right choice.
- A common goal. If both sides – the company and investors – have a common goal, the deal will definitely take place.