Private Equity Deal Process PDF

The Private Equity Deal Process wallstreetprep.com THE PRIVATE EQUITY DEAL PROCESS PE Deal Process Introduction Licensed to Jesse Spivak. Email address: [email protected] Meet Your Instructors Mike Kimpel...

The Private Equity Deal Process wallstreetprep.com THE PRIVATE EQUITY DEAL PROCESS PE Deal Process Introduction Licensed to Jesse Spivak. Email address: [email protected] Meet Your Instructors Mike Kimpel Zack Freeman [email protected] [email protected] Licensed to Jesse Spivak. Email address: [email protected] Welcome to Private Equity (PE) You’ve arrived at your new Private Equity (PE) job and it is day one. You’ve jumped over numerous hurdles to get here and you want to succeed, but what exactly will you do day-to-day? How do you succeed in this new role? We designed this course to give you the knowledge and hands on experience you need to succeed on the job. Licensed to Jesse Spivak. Email address: [email protected] What is Private Equity? Let’s begin with a brief recap of what we mean when we say “private equity.” Private Equity Private equity is an alternative investment class that is composed of Growth Equity funds and investors that directly invest in private companies, or that engage in buyouts of public companies (“take- Venture Capital privates”). In this course we are focused on private Angel Investors equity funds with mid-to late-stage mandates. Start-Up Early Growth Later Stage Licensed to Jesse Spivak. Email address: [email protected] How PE Firms Work Limited Partners (LPs) Private Equity Firm 2016 Vintage Fund (Limited partnership) General partners (GPs) GPs manage each fund. Investment 1 Investment 2 15-20% of the fund’s returns are kept by Investment 3 Investment 4 Insurance, Pension the GPs (carried interest, or “promote”). universities, funds, 43% wealthy The remaining 80% are distributed to LPs. Investment 5 Investment 6 individuals, Separately, GPs also charge portfolio Investment 7 Investment 8 other, 48% companies fees (usually shared with LPs). Sovereign Investment 9 Investment 10 2016 vintage fund funds, 9% LPs commit capital 2011 vintage fund and pay an annual Fund returns come in management fee of 2006 vintage fund the form of exits via 1.5-2.0% IPOs, sales, dividend 2001 vintage fund recaps, and fees Licensed to Jesse Spivak. Email address: [email protected] Typical PE Firm Investment Investments 2016 Vintage Fund (Limited Partnership) Portfolio companies are acquired using the Investment 1 Investment 2 equity raised in the fund along with debt Investment 3 Investment 4 raised from various lenders Investment 5 Investment 6 Going from start to finish with one of these investments is the heart of this course Investment 7 Investment 8 Investment 9 Investment 10 Some rules of thumb Number of investments in fund can range from 10-20+ Life of investment 5-7 years Licensed to Jesse Spivak. Email address: [email protected] Deal Catalyst Most deals begin when a company’s shareholders decide to sell their company In most cases, management reaches out to an investment banker to market the company (in the same way a realtor would market a house) The investment banker will collect data from the company and construct marketing materials that highlight the company’s strengths The banker will then distribute the materials to a group of potential buyers, which often includes PE firms This is the beginning of what is referred to as a “sell-side” process Licensed to Jesse Spivak. Email address: [email protected] Auction vs. Negotiated Sale The two main types of deal processes in private equity are an Auction or a Negotiated Sale PE firms generally prefer a negotiated sale because it results in a lower price Auction Negotiated Sale VS (or Proprietary Deal) Generally multiple buyers invited to bid One buyer in conversation Often pay a higher price due Can often negotiate a lower price to competition Licensed to Jesse Spivak. Email address: [email protected] Auction vs. Negotiated Sales: Course Flow This course follows the typical steps in an Auction Auction process because auctions progress along a fairly linear path Start Finish The checkpoints are generally the same for both an Auction and a Negotiated Sale However, with a Negotiated Sale the steps Negotiated Sale don’t necessarily occur in order and thus would be much harder to follow Start Finish As a result, we will use the Auction process as a baseline Licensed to Jesse Spivak. Email address: [email protected] The Primary Workstreams To execute a buyside Acquisition Process investment, PE professionals must manage multiple Internal and external checkpoints beginning with teaser workstreams review through funding the deal This course is primarily focused on the acquisition Financing Process and financing process Working with lenders to secure debt financing workstreams, whereas business and financial due diligence are covered in a Business and Financial Due Diligence separate WSP module Digging into the business to understand key trends which inform model and thesis Licensed to Jesse Spivak. Email address: [email protected] Deal Process: Zoomed-in View Data Room Loop Business/Financial Short-Form Due Diligence Long-Form Model + Operating Model Model Data Cleaning & Analysis Accountants (Financial + Tax) Strategy Consultants Pre-LOI Memos Pre-IOI Decks/ Deck/ Deck/ Update Decks/Memos Memo Memo Acquisition Mgmt Process Teaser NDA CIM IOI LOI APA/SPA Closing Pres Lawyers Data Room Final Process Review Lender Lender Initial Term Credit CIM Term Sheet/ Agreement Review Sheet Sponsor Model Review Letter Licensed to Jesse Spivak. Email address: [email protected] Analyst/Associate vs. Vice President Roles Most new PE professionals will join as an Analyst (post-undergrad), Associate (following 2-3 years in investment banking or consulting), or as a Vice President (post-MBA). Note that titles do vary from firm to firm. The responsibilities for each of these roles are different across the deal process, vary by firm, and will be highlighted throughout this course. Below is a brief summary capturing the broad nature of the work in each role: Analyst/Associate Vice President Model construction Model review IC deck/memo construction IC deck/memo design and review Diligence process management Diligence process oversight Basic/first-pass legal documents Final/definitive legal documents Licensed to Jesse Spivak. Email address: [email protected] JoeCo Case Introduction CASE STUDY Throughout this course we will be using JoeCo as our case company to go through the PE deal process It is not a real company, but the process we’ll go through closely mirrors what you’d see in a typical deal process We’ll also share examples of publicly sourced, real-life materials along with “Plain English” annotations to bring the documents to life Licensed to Jesse Spivak. Email address: [email protected] JoeCo Company & Situation Overview CASE STUDY Company Name: JoeCo, Inc. Company Description: Founded in 2010 and headquartered in Woburn, MA, JoeCo is a private American coffee company and coffeehouse chain. Situation: JoeCo is experiencing increased growth and is looking for private equity investors to come on board to help them continue to grow. Our Job: Determine whether we want to acquire JoeCo. We are going to walk through the entire deal process from an Associate/Vice President point of view. Licensed to Jesse Spivak. Email address: [email protected] The Key Players Working Group List Company Name/Title Zachary Freeman Seller JoeCo, Inc. CEO Matan Libman “Sell-Side” Investment Banker Beacon Street Advisory Partners Managing Director Jennifer Smith Managing Director PE Fund Wall Street Prep Capital Partners Robert Johnson Principal Arkady Feldman Lender Feldman Capital Partners, Inc. Managing Director Licensed to Jesse Spivak. Email address: [email protected] Where We’re Headed Week # 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Week Ending Item 9/15 9/22 9/29 10/6 10/13 10/20 10/27 11/3 11/10 11/17 11/24 12/1 12/8 12/15 12/22 12/29 1/5 1/12 1/19 1/26 2/2 2/9 Teaser Sent x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 NDAs 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 NDA Sent 0x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 NDA Signed 0 0x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Financing Indicative Term Sheet Provided 0 0 0 0 0 0x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 First Round Bids First Round Bid Submission 0 0 0 0 0 0x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 First Round Bids Due 0 0 0 0 0 0 0x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Second Round Participant Decisions 0 0 0 0 0 0 0 0x 0 0 0 0 0 0 0 0 0 0 0 0 0 Diligence Management Presentation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Commitment Received 0 0 0 0 0 0 0 0 0 0 0x 0 0 0 0 0 0 0 0 0 0 Second Round Bids Due 0 0 0 0 0 0 0 0 0 0 0x 0 0 0 0 0 0 0 0 0 0 LOI Expiry 0 0 0 0 0 0 0 0 0 0 0x 0 0 0 0 0 0 0 0 0 0 LOI Signing / Exclusivity Begins 0 0 0 0 0 0 0 0 0 0 0x 0 0 0 0 0 0 0 0 0 0 Sponsor DD Target End 0 0 0 0 0 0 0 0 0 0 0x x x x x 0 0 0 0 0 0 Lender DD Target End 0 0 0 0 0 0 0 0 0 0 0x x x x x x 0 0 0 0 0 Documentation and Closing Doc Negotiation Target Completion 0 0 0 0 0 0 0 0 0 0 0x x x x x x x x 0 0 0 Deal Closing 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0x Licensed to Jesse Spivak. Email address: [email protected] Private Equity Deal Process: Interchangeable Pre-deal Non-Disclosure Agreement (NDA) = Confidentiality Agreement (CA) Process Terms Confidential Information Memorandum (CIM) = Confidential Before we move ahead, Information Presentation (CIP) = Offering Memorandum (OM) people in the PE world Mini-Model = Short-form Model First Round use a variety of terms Bid/IOI Pre-IOI Investment Committee (“IC”) Memo = First Round IC Memo interchangeably, and = First Pass Memo = Screening Memo we would like to clarify IOI = Non-binding Bid = Non-binding LOI = First Round Bid that up front (as best we can!) Diligence LOI = Binding Bid = Final/Second Round Bid Deep Dive/ Final Model = Long-form Model Please note that these LOI Pre-LOI IC Memo = Final IC Memo terms vary by firm and can overlap in Post-LOI Working Capital Target = Working Capital Peg some cases Process Licensed to Jesse Spivak. Email address: [email protected] Private Equity Deal Process Pre-Deal First Round Diligence Post-LOI Closing Process Bid/IOI Deep Dive/LOI Deal Process 1-2 Weeks 2-4 Weeks 4-12 Weeks 4-20 Weeks 1-2 Weeks Deal Team Process Deal Team Process Third Party Resources Deal Team Process Third Party Resources Teaser review CM/OM review Lawyers On-site diligence/ Legal support for NDA/CA negotiation Pre-IOI IC memo + Accountants management meetings regulatory approval mini-model Strategy consultants Final reports from third Initial financing source party resources Deal Team Process indications Deal Team Process Update memos + Capital call IOI submission Data room access & models (as needed) Funds flow due diligence lists Negotiate final Management meetings APA/SPA Commercial financing Working capital targets Pre-LOI IC memo + full Negotiate final Credit model Agreement LOI submission Negotiate final Transition Services Agreement (carve-outs only) Licensed to Jesse Spivak. Email address: [email protected] THE PRIVATE EQUITY DEAL PROCESS Teaser and NDA Licensed to Jesse Spivak. Email address: [email protected] The Teaser DISCUSSION The Situation: You’ve arrived at your desk and your Principal sends you a teaser, which was received from an investment banker. The Principal wants to know if it looks interesting. Licensed to Jesse Spivak. Email address: [email protected] What do I think? Licensed to Jesse Spivak. Email address: [email protected] The Teaser (cont’d) DISCUSSION Teasers: Documents used to market a company/generate interest. Your Job: Should we spend time on this? Teasers Include: Basic details including summary financials, basic overview of the business, and investment highlights. Licensed to Jesse Spivak. Email address: [email protected]  Now that you know what’s generally included in a teaser, what’s not included? Licensed to Jesse Spivak. Email address: [email protected] What’s not included in a teaser? DISCUSSION Confidential figures, numbers, and projections Detailed information The company’s name is typically not included In most cases, the company is anonymized, i.e. ”A Coffee Company” Licensed to Jesse Spivak. Email address: [email protected]  Now that we’ve answered the question of what this business does, how do we figure out if this is something we should move ahead with? Licensed to Jesse Spivak. Email address: [email protected] How Do We Decide To Move Ahead? DISCUSSION You may want to move beyond the teaser phase if the company seems interesting based on your knowledge of the industry. Should we move forward? Does this fit our mandate? If not, let’s not spend time on this. Is this something that’s interesting? Is it a growing business? Is the management team solid? Is this company a perfect fit for us? Licensed to Jesse Spivak. Email address: [email protected] Teaser: Purpose, Process, and Role Document Purpose Deal Process Your Role A teaser aims to attract A sell-side banker will You’ll often review many interest from potential distribute teasers to teasers before finding buyers potential buyers (including an attractive candidate Provides a 1–2-page PE firms) worth pursuing summary of a potential sale If your team decides to move Associates & VPs: process typically without forward, you will reach out Your objective is to mentioning the name of the to the banker and request understand the business target company the seller’s non-disclosure and quickly get to a agreement to move forward go/no-go decision in the process Licensed to Jesse Spivak. Email address: [email protected] Teaser: Summary A teaser exhibits the unique selling points of the company often on an anonymized basis in a 1-2-page document Bankers typically include the following items to entice potential buyers: Business Industry Transaction Location Description Overview Structure Investment Summary Customer Banker Rationale Financials Overview Information Licensed to Jesse Spivak. Email address: [email protected] Teaser: Content Deep Dive Content Why Do We Care? The nature and type of products or Helps you understand the Business Description services offered company’s business Investment highlights of the company Gives you the reasons why you should Investment Rationale consider buying the business Location of the company’s Shows you where the company Location headquarters operates and if there are location-based synergies High-level financial metrics Gives you a sense for growth, margin Summary Financials and cash flow profile Licensed to Jesse Spivak. Email address: [email protected] Teaser: Content Deep Dive (cont’d) Content Why Do We Care? A brief summary about the industry Helps you understand tailwinds/ Industry Overview and the competitive landscape headwinds in the company’s industry Highlights a few of the company’s Gives you a high-level overview Customer Overview key customers of customer mix Nature of the transaction as expected Provides context on type of proposed Transaction Structure by the seller transaction (carve-out, minority investment, etc.) The contact details of the investment Identifies the point person to contact if Banker Information bankers representing the company you’d like to proceed with the process Licensed to Jesse Spivak. Email address: [email protected] Teaser Review Exercise Exercise Below are the typical questions asked when performing a teaser review: What does this company do? Does this fit our mandate and/or industry focus? Assume JoeCo fits our mandate What is the growth profile/opportunity? Does the company have a competitive advantage? Are the financials compelling? Is management qualified? See if you can answer these questions for JoeCo’s teaser. Licensed to Jesse Spivak. Email address: [email protected] Teaser Exercise Licensed to Jesse Spivak. Email address: [email protected] Teaser Review Exercise: Key Questions DISCUSSION What does this company do? What is the growth profile/opportunity? Are the financials compelling? Is management qualified? Licensed to Jesse Spivak. Email address: [email protected] Teaser Review Exercise: Company Profile DISCUSSION Sells their product both wholesale and retail The market they’re in is growing at 2.5% per year A diverse wholesale customer base Proprietary coffee bean roasting process Licensed to Jesse Spivak. Email address: [email protected] Teaser Review Exercise: Concerns DISCUSSION The company’s barriers to entry Considerable potential for competitors Questions surrounding subscription models Licensed to Jesse Spivak. Email address: [email protected] Teaser Review Exercise: Other Thoughts DISCUSSION Do you like the financials? What are your thoughts on management? Qualified management – over 30 years in the industry. Financials seem strong, but we should dig further to understand factors driving growth. Regarding revenue numbers, we should dig further… Teaser’s revenue by channel is a 2019 snapshot. We should ask “How profitable are these channels over time?” Licensed to Jesse Spivak. Email address: [email protected] Are we ready to ask for the NDA? YES NO Licensed to Jesse Spivak. Email address: [email protected] Teaser Review Exercise: Are We Ready to Ask for the NDA? DISCUSSION Why ‘No’? TA Note “Premium coffee” movement While keeping your position in the firm in might be a fad mind and the firm’s philosophy on when to Payback period seems request confidential information underwhelming…leaves too You’ve seen generic information up to much time for the ”premium this point coffee” fad to diminish What we’re after is…is this company interesting enough? Margins may not be sustainable Licensed to Jesse Spivak. Email address: [email protected] Is there a cost associated with getting an NDA? Licensed to Jesse Spivak. Email address: [email protected] NDA Cost DISCUSSION The cost of moving ahead to an NDA is low. NDAs are typically done in-house using in-house resources. Licensed to Jesse Spivak. Email address: [email protected]  How many funds can an advisor send a Teaser to? Is there a downside to sending too many? Licensed to Jesse Spivak. Email address: [email protected] Sending Teasers DISCUSSION The number of Teasers to send is a decision between sell-side advisor and seller. Once the decision to sell is definite, reaching out to a broad range increases changes of a good offer. There is no real downside to reaching out to all potential buyers. Licensed to Jesse Spivak. Email address: [email protected] Teaser: Pro-Tips As mentioned, you’ll be asked to review numerous teasers and your job is to get through them efficiently to make a go/no-go decision. The below tips will help you in that effort: Learn the criteria: When you join a new firm, figure out as quickly as possible what key criteria your team focuses on (e.g., industry, size, growth and margin profile, capital intensity, etc.) by looking through previous memos, talking to colleagues, etc. Build a checklist: From the above items, build a checklist to review each time you go through a teaser. Build an output template: If it doesn’t already exist, build an output template to use when you’d like to convey a new idea to your team. Licensed to Jesse Spivak. Email address: [email protected] Sample Real Life Teaser Licensed to Jesse Spivak. Email address: [email protected] The NDA DISCUSSION Your Principal agrees that this is an interesting opportunity. You reach out to the bankers, and they send you an NDA because the client needs to protect their information. Licensed to Jesse Spivak. Email address: [email protected] What types of provisions do you think the seller will include to protect itself? Licensed to Jesse Spivak. Email address: [email protected] The NDA: Seller Provisions DISCUSSION The buyer is required to remove all confidential information post-disengagement (i.e., not moving forward in the process). This provision is used to require the buyer to return the material in-person or to physically destroy it (though given the usage of electronic records nowadays, this just entails wiping relevant digital files). Licensed to Jesse Spivak. Email address: [email protected]  What if JoeCo was a publicly traded company? Licensed to Jesse Spivak. Email address: [email protected] The NDA: What If JoeCo Was a Publicly Traded Company? DISCUSSION For publicly-traded sellers, one distinction is Besides not being able to make trades using an additional clause intended to prevent this confidential information, the buyer will be insider trading. restricted from taking a stake in the company for a specified duration (usually ~12 months If the buyer were to make illegal trades using minimum). this confidential information, the buyer has committed insider trading. Standstill provisions govern how the potential buyer can (or cannot) purchase the stock of Sharing of confidential information with an the target company after being shown this outside investor is also prohibited (e.g., confidential material. tipping a trader off). Without the inclusion of this clause, a buyer could take a controlling stake in the target’s common equity and the attempt to force a deal through its voting power. Licensed to Jesse Spivak. Email address: [email protected] The NDA: PE Firm Perspective DISCUSSION While the PE firm seeks to review the new opportunity in detail, it needs to avoid agreeing to onerous terms. PE firms want to avoid being tied to agreements that last several years or an indefinite period (i.e., no longer than necessary, usually ~1-2 years). Clearly-defined, specific terms should be listed in the NDA as this makes a breach less probable. Licensed to Jesse Spivak. Email address: [email protected] The NDA: Seller Employee Considerations DISCUSSION From the seller’s viewpoint, ideally the only employees who should be aware of the sale process should be at the senior level. Company employees becoming aware of the sale could create destabilization within the company and disrupt business operations (e.g., distracted employees, higher compensation requests, and/or move to a different job). Strategic buyers or financial sponsors that own a portfolio company that directly competes with the target could attempt to hire their employees – therefore, a non- solicit agreement will be necessary to prevent this. Licensed to Jesse Spivak. Email address: [email protected] NDA: Purpose, Process, and Role Document Purpose Deal Process Your Role Defines what information If you like the company Associates/VPs: can be exchanged and presented in the teaser, This process may be terms of confidentiality. you’ll ask the sell-side handled by you but has Maintains the banker to send an NDA to increasingly been confidentiality of the the PE firm. outsourced to legal company’s identity. counsel. Even when the You’ll work with the NDA negotiation is banker to negotiate a outsourced, you’ll often mutually agreeable quarterback the process. document. Licensed to Jesse Spivak. Email address: [email protected] NDA: Summary An NDA defines what information exchanged between the seller and the buyer is confidential and limits how the buyer may use the seller’s confidential information. Critical clauses include: One-way vs. Term Confidentiality Non-Solicit Standstill Mutual The length of time Defines what Prohibits our firm Determines whose Governs how a we each party is tied information is from soliciting information is can purchase to the agreement considered confidential target company protected stock of the target employees company Licensed to Jesse Spivak. Email address: [email protected] NDA: Critical Clauses Deep Dive Why Do We Care? Typical Terms We don’t want to be restricted by an Typically 1-2 years Term agreement longer than necessary We need to know what constitutes Typically includes all information the Confidentiality “confidential” information company discloses Non-Solicit We can’t hire the seller’s employees Typically 1-2 years A “one-way” agreement protects only what Generally one-way unless the bidder is the seller discloses sharing information One-way vs. Mutual A “mutual agreement” protects both sides’ disclosures Prevents us from buying seller stock and Typically can’t buy stock in seller for 12-18 Standstill forcing a deal months Only relevant for publicly traded companies Licensed to Jesse Spivak. Email address: [email protected] NDA: Additional Clause Reference All parties working with you as the buyer who will gain Representatives access to confidential materials. The parties in an NDA are the potential buyer and seller. The Parties NDA describes the buyer as the “Receiving Party” and the seller as the “Disclosing Party”. Provision that all information, including all physical and Return/Destruction of Information electronic data, should be returned or destroyed if the parties terminate negotiations or if requested. Provision that specifies the acceptable remedies in the case Remedies of a breach. Licensed to Jesse Spivak. Email address: [email protected] NDA: Additional Clause Reference (cont’d) Defines the intended use of the shared confidential Permitted Use of Information information. States that the agreement will be governed by a State body Governing Law and Jurisdiction and the language of conduct for court proceedings in case of any dispute regarding the confidentiality. The receiving party ensures that the language clearly Binding Agreement distinguishes and differentiates the NDA from an agreement to negotiate a transaction. Licensed to Jesse Spivak. Email address: [email protected] NDA: Review Exercise Exercise Below are the typical questions asked when performing an NDA review: What constitutes “confidential” information? What is the term of the NDA? Is there a non-solicit clause in the NDA? If so, for how long does it remain enforceable? See if you can answer these questions for JoeCo’s NDA Licensed to Jesse Spivak. Email address: [email protected] NDA Exercise Licensed to Jesse Spivak. Email address: [email protected] What did you determine is confidential information? Licensed to Jesse Spivak. Email address: [email protected] The NDA: Confidential Information DISCUSSION Any materials that could be used for evaluation. Any information created using the above materials. Licensed to Jesse Spivak. Email address: [email protected] NDA Exercise Review Licensed to Jesse Spivak. Email address: [email protected] What about the information already in our possession/that we already knew before receiving the NDA? Licensed to Jesse Spivak. Email address: [email protected] The NDA: Confidential Information Exceptions DISCUSSION Publicly available information prior to NDA is not considered confidential. Licensed to Jesse Spivak. Email address: [email protected]  What’s covered by the Term and Non-Solicit clause? Licensed to Jesse Spivak. Email address: [email protected] The NDA: Term and Non-Solicit Clause DISCUSSION Section 2: Term = 18 months Section 6: Non-Solicitation Clause We cannot contact/solicit the Target during the Term Licensed to Jesse Spivak. Email address: [email protected]  If you are at a large, multi-strategy firm that invests in several different asset classes, how do you decrease the risk of potentially causing damages to your other divisions (e.g., credit fund)? Licensed to Jesse Spivak. Email address: [email protected] Decreasing Division Risk DISCUSSION The signing of the NDA is done on the entity level, meaning the receiving party is the entity (i.e., the specific fund). The relevant party includes just the investment professional in this particular fund itself, rather than the other divisions that invest in different asset classes or the portfolio companies that the firm owns. Licensed to Jesse Spivak. Email address: [email protected]  How often are NDAs breached that have resulted in litigation? Licensed to Jesse Spivak. Email address: [email protected] NDA Breaches DISCUSSION Breaches of NDAs are rarely seen – not because they don’t occur but because they are very difficult to litigate. NDAs are more of a preventative measure intended to protect the seller and set the terms of the engagement. Even though buyers are required to destroy documents post-disengagement – in practice, most do not. Licensed to Jesse Spivak. Email address: [email protected]  If a firm gains access to confidential information regarding competitors, could this intel be used internally or is there a legal responsibility to not discuss this information? Licensed to Jesse Spivak. Email address: [email protected] Access to Confidential Information DISCUSSION From a legal standpoint, the firm should not discuss this information internally. Licensed to Jesse Spivak. Email address: [email protected] From the teaser to the LOI stage, how many buyers are involved? Licensed to Jesse Spivak. Email address: [email protected] Number of Buyers Involved DISCUSSION During the initial stage, the sell-side bank will generally send out around 40 to 60 teasers. But over time the number of potential buyers drastically reduces as the sale process goes on (i.e., “funnel down”). A sell-side banker should receive 5 to 10 IOIs, of which 3 to 5 interested bidders will submit formal LOIs. Licensed to Jesse Spivak. Email address: [email protected] Sale Process Structure DISCUSSION There are two strategies that bankers use to structure their sale process: 1. A broad process 2. A narrow process A broad process will be greater in terms of scope and the number of initial buyers – this is done to create a competitive environment since competition leads to a higher exit valuation. On the other hand, narrow processes are often started by “fireside chats” with just a handful of parties – there will usually be pre-existing relationships and these closed-door sale negotiations tend to be friendlier. Licensed to Jesse Spivak. Email address: [email protected]  How often do private equity firms set up calls with bankers once they receive the teaser? Licensed to Jesse Spivak. Email address: [email protected] Calls DISCUSSION A sell-side bank will rarely set up calls Sell-side bankers will usually set up with private equity firms after they calls with potential buyers after receive a teaser. sending out the CIM given the buyer now has more meaningful information The only times this would happen to discuss and the NDA has been would be if the buyer required signed. additional clarification on the teaser, but it tends to be a quick chat to clear On behalf of the management team, the up confusion (i.e., not a detailed sell-side bank can answer initial discussion about the company questions from interested buyers. being sold). Licensed to Jesse Spivak. Email address: [email protected] THE PRIVATE EQUITY DEAL PROCESS The CIM and IC Memo Licensed to Jesse Spivak. Email address: [email protected] IOI Phase DISCUSSION The NDA has been executed and the sell-side investment bank distributes the CIM to your PE firm. Your principal asks you to review the CIM. Standardized investment memo template specific to the firm are generally used to present an overview of the business, summary financials with the key metrics, and an initial thesis. The goal is to go through the CIM and give your initial thoughts on the company. Licensed to Jesse Spivak. Email address: [email protected] What is the goal of the sell-side when preparing a marketing document for release to potential buyers? Licensed to Jesse Spivak. Email address: [email protected] Goal of the Sell-side DISCUSSION The goal is to promote the business The seller will give “high level” to perspective buyers. information with the objective of obtaining a first-round bid. Information that promotes the business as a good target will Because the motive of a sell-side be included. banker is to raise interest from prospective investors and sell the ”In-depth” information that may raise company at the highest valuation questions of a critical nature would not possible…these marketing documents be included at this point. (e.g., teaser, CIM) must be viewed wit ha certain level of skepticism. Licensed to Jesse Spivak. Email address: [email protected] First Pass Review DISCUSSION At the first pass stage, the associate is first trying to determine if the company meets the fund’s investment criteria. Besides checking if this company might be a potential “fit” for the fund, the financial profile (growth trajectory, past margins) must be taken into consideration. The goal at this stage is to get a sense of whether the firm should spend more time looking into this opportunity or not. Licensed to Jesse Spivak. Email address: [email protected] Other Key Considerations DISCUSSION Given the use of leverage in private equity deals, other areas of diligence include the free cash flow conversion and historical profitability of the business. Capital-intensive businesses with high Capex requirements are deemed unattractive as LBO candidates. Cyclicality and seasonality in the cash flow generation is viewed negatively as well, considering the scheduled amortization and interest expense payments. Licensed to Jesse Spivak. Email address: [email protected] The CIM Introduction Licensed to Jesse Spivak. Email address: [email protected] ACEP Scenario DISCUSSION Imagine ACEP underwent an LBO and Stratosphere Gaming burned down…the investment would be in real trouble. The investment is in serious trouble since Stratosphere accounts for 46.3% of 2006 PF Net EBITDA – nearly half of ACEP’s cash flow has vanished. High concentration in one business division, customer, or supplier poses a significant risk in private equity. Licensed to Jesse Spivak. Email address: [email protected] Concentration Rule Exception DISCUSSION An exception to the concentration rule would be if there are irrevocable contracts in place (i.e., long-term agreements). The contractual obligation between the company and customer makes the concentration of risk more tolerable but could still result in a discount on the purchase price. For the most part, concentration is problematic and can single-handedly ruin the returns on an investment. Licensed to Jesse Spivak. Email address: [email protected] Cyclicality Risk DISCUSSION Cyclicality refers to material swings in the performance of a business, which can be troubling for companies with a high amount of debt in their capital structure. Private equity investors desire stability in revenue and predictability. Cyclicality is counteractive to those traits. Licensed to Jesse Spivak. Email address: [email protected] CIM: Purpose, Process, and Role Document Purpose Deal Process Your Role Provides detailed Once your firm has You look at the company from all information about executed the NDA, perspectives and then decide whether your the target company’s the sell-side banker firm is willing to submit a bid and, if so, for business, industry, will send you the CIM how much. management and for review. VPs: Often do a quick read to see if the financials. company is interesting. Work with the associate to summarize findings. Associates: You often review these in detail and provide a summary of findings to your team. Licensed to Jesse Spivak. Email address: [email protected] CIM: Summary 20 to 100+ pages, the document gives you detailed information about the target company’s business, industry, management and financials. Bankers typically include the following items in a CIM: Overview & Company Industry Products & Investment Overview Overview Services Highlights Financials: Customer Revenue Management Historical & Profile Profile Projected Licensed to Jesse Spivak. Email address: [email protected] CIM: Review Exercise Exercise Below are the typical questions asked when reviewing the CIM: What does this business do? How does this company generate revenue or profit? What are the growth opportunities? What are industry trends? Is the industry cyclical? What are the next steps in the deal process? See if you can answer these questions for JoeCo’s CIM Licensed to Jesse Spivak. Email address: [email protected] Reviewing the CIM DISCUSSION Typical questions during CIM review would be: What does JoeCo do? How does it make money? What are the growth opportunities? Licensed to Jesse Spivak. Email address: [email protected] Investment Highlight #3: Multiple Expansion Opportunities Opportunity Stage Offering coffee subscriptions Have run a limited pilot for Coffee Subscription to customers 3 years and preparing for full launch Expand customer base to Performing exploratory research Medium & Large Corporate medium and large corporate Customers clients Establishing a fully-integrated Not yet initiated Coffee Marketplace coffee marketplace Implementing café management Not yet initiated Café Management Software software to streamline services Licensed to Jesse Spivak. Email address: [email protected] What other questions arise from the CIM? Licensed to Jesse Spivak. Email address: [email protected] CIM: Key Questions DISCUSSION On the coffee-subscriptions side, has JoeCo tried any other direct-to-consumer (DTC) initiatives? The pilot run has been going on for 3 years now – what is going on and why has it not yet expanded? Why is there only one growth initiative close to launching? What are industry trends? Is the industry cyclical? Licensed to Jesse Spivak. Email address: [email protected] CIM Exercise Review Licensed to Jesse Spivak. Email address: [email protected] Is JoeCo a cyclical business? Licensed to Jesse Spivak. Email address: [email protected] Cyclicality DISCUSSION Clear consensus: No JoeCo would not be considered a cyclical business as consumers drink coffee in and out of a recession. Licensed to Jesse Spivak. Email address: [email protected] CIM: Pro-Tips VPs and above typically read through CIMs (or at least skim them) to see if they look interesting. Associates typically take the first crack at reading through a CIM in detail and summarizing. You should understand the key information you want to gather from the document in order to summarize for the broader deal team. We recommend the following: Learn the CIM focal points: Learn as quickly as possible the typical structure of a CIM and the key information you want to extract from it. Start by pulling 5-10 of your firm’s past CIM summaries to understand the typical focal points. These may be informal (i.e., without a template), so you might need to ask a peer for examples. Build a checklist: Build a checklist to review each time you go through a CIM. Start your question list: As you read the CIM, start forming a list of questions for the management team. Licensed to Jesse Spivak. Email address: [email protected] Investment Committee (IC) Memo DISCUSSION We’ve read the CIM, learned a lot about the company and we’re ready to present our initial thoughts to the team. Generally, an Investment Committee (IC) is presented to the deal team. Occasionally an IC might be presented to the whole firm, especially if the bid is deemed a high priority. Important: Some firms do not go to the investment committee before submitting a bid. The decision to go to a committee can vary by deal. Licensed to Jesse Spivak. Email address: [email protected] What Is In An IC Memo? DISCUSSION The IC Memo presents our views on the potential bid up to this point. A model is sometimes built at this point. Licensed to Jesse Spivak. Email address: [email protected] Pre-IOI IC Memo: Purpose, Process, and Role Document Purpose Deal Process Your Role To present initial Deal team presents key analysis VPs: You work with the diligence findings to from the CIM along with associate to put the IC Memo members of the firm preliminary returns in a summary together. to gain buy-in so the format. Associates: You usually take deal team can Presentations can be firmwide or the lead in building the mini- proceed in the deal one-off depending on the firm/deal. model. The VP often provides process. guidance on memo Often, the deal team needs sign off construction. from senior firm members in order to continue with the process. Licensed to Jesse Spivak. Email address: [email protected] Pre-IOI IC Memo: Summary 5 to 25+ page document that gives senior members on the deal team (or the entire firm) information about the target company’s business, the market, management and financials, as well as your proposed bid. You typically include the following items in an IC Memo: Preliminary Business Investment Mini-Model Overview Thesis Initial Data Analysis Process Summary Summary Overview Financials Returns Licensed to Jesse Spivak. Email address: [email protected] Pre-IOI IC Memo: Content Deep Dive Content Why Do We Care? High-level overview of the company Provides a quick summary Business Overview on the business Summary timeline of the deal It’s important to lay out the Process Overview process and competitive dynamics expected timing of the process and to provide plan of attack High-level investment thesis To explain the deal team’s view Preliminary Investment and supporting facts on the target company and how Thesis it fits with your firm’s investment mandate Summary of the company’s Provides context on the financial Summary Financials financials profile of the company Licensed to Jesse Spivak. Email address: [email protected] Pre-IOI IC Memo: Content Deep Dive (cont’d) The mini-model and summary returns are important parts of an IC Memo. Content Why Do We Care? A “simple” model typically using Provides a sense for how the Mini-Model management and base case business is expected to perform assumptions Summary of the returns from the To convey what the deal looks like deal, often using the management from a returns perspective as well Summary Returns and base case financials as the potential range of return outcomes Licensed to Jesse Spivak. Email address: [email protected]  What about firms without an internal operations teams? Licensed to Jesse Spivak. Email address: [email protected] In-house Consultants DISCUSSION Some firms will have an internal operations team intended to provide consulting services for the private equity firm’s portfolio companies (e.g., KKR Capstone). Consultants often come in an at the later stages once the acquisition has been completed to help with the transition. Broadly, there are two types of firms when it comes to placing IOIs: Some firms take a “focused” approach, and others choose to play the “numbers game.” The firms that do indeed bring in consultants during the IOI stage tend to be firms that take the focused approach and look at fewer deals. Licensed to Jesse Spivak. Email address: [email protected] THE PRIVATE EQUITY DEAL PROCESS Mini-Model Licensed to Jesse Spivak. Email address: [email protected] IC Memo Mini Model Licensed to Jesse Spivak. Email address: [email protected] Mini Model Walkthrough Licensed to Jesse Spivak. Email address: [email protected] Inputs and Assumptions, I Licensed to Jesse Spivak. Email address: [email protected] Inputs and Assumptions, II Licensed to Jesse Spivak. Email address: [email protected] Sources & Uses Walkthrough Licensed to Jesse Spivak. Email address: [email protected] P&L and Working Capital Walkthrough Licensed to Jesse Spivak. Email address: [email protected] Cash Flow Statement Licensed to Jesse Spivak. Email address: [email protected] Revolver and Debt Licensed to Jesse Spivak. Email address: [email protected] Interest Schedule Licensed to Jesse Spivak. Email address: [email protected] Returns Analysis Licensed to Jesse Spivak. Email address: [email protected] Management Rollover Licensed to Jesse Spivak. Email address: [email protected] THE PRIVATE EQUITY DEAL PROCESS Initial Financing Indication Licensed to Jesse Spivak. Email address: [email protected] Pre-IOI IC Memo: Pro-Tips Associates are typically responsible for VPs may design the deck and review it building an internal memo and once completed, depending on the constructing mini-models. Associate’s level of experience. We recommend the following: Learn the focal points: Learn the typical contents of a pre-IOI IC memo as quickly as possible. Start by pulling 5-10 recent memos. Learn to build mini-models quickly: Find past mini-models and learn how to quickly update them for new deals. Licensed to Jesse Spivak. Email address: [email protected] Initial Financing Source Indications THINKING STOP You’ve just gone through the Pre-IOI IC Memo with your full deal team and the consensus is that the company is worth pursuing. The Principal asks the VP to get on the phone with lenders and walk them through the opportunity in order to secure preliminary financing indications. What information will the lenders need? What sorts of things should you care about in the initial financing indication (the “Indicative Term Sheet”)? Licensed to Jesse Spivak. Email address: [email protected] What do we need to share with lenders to get their preliminary view on the deal? Licensed to Jesse Spivak. Email address: [email protected] Preliminary Lender Discussion DISCUSSION The actual financials of the target, showing historical performance, are more useful to lenders than projections. Lenders are more concerned with the past profitability of a company and its capability of making scheduled payments. Cash flow, especially operating cash flow, will be important to lenders. Licensed to Jesse Spivak. Email address: [email protected] Lender/Equity Investor Disconnect DISCUSSION Lenders, as opposed to equity investors, are concerned with the company’s ability to make payments over time. Cash flow sheds light on this. Lenders are generally “backward-looking” and focused on how the company performed in past economic cycles. They’re more concerned with the downside case since even if the company performs well, the lenders to not get the upside. The validity of the continued generation of cash flows to satisfy their debt obliterations is of the highest importance. Licensed to Jesse Spivak. Email address: [email protected] Lender Case Assumption Differences DISCUSSION One distinction when dealing with lenders is there is little incentive to show aggressive assumptions. Lender case tends to be lower than the base case figures to have the debt covenants set off a lower base. No rational reason for a sponsor to stretch their assumptions – they just need the initial lender terms (e.g., rates, maturities, amortization) for their IOI to be credible. Licensed to Jesse Spivak. Email address: [email protected] Initial Financing Source Indications: Purpose, Process, and Role Document Purpose Deal Process Your Role Provides an initial The deal team will reach out to VPs: You typically take lead sense for the terms financing sources with whom on this process. lenders would likely it maintains strong relationships to Associates: You assist with agree to. obtain “market” or better terms. providing deal-related The deal team will share basic materials to financing materials (CIM, financials, etc.) sources. under the protection of an NDA so the financing source can review and provide a preliminary term sheet. Licensed to Jesse Spivak. Email address: [email protected] Initial Financing Source Indications: Summary 1 – 2-page document When lenders submit an Indicative Term Sheet, they generally include: Debt Tranches/Size/ Covenants & Maturities Leverage (x) Other Provisions Mandatory Interest Rates/Spreads (Amortization) & Fees Optional Repayments Licensed to Jesse Spivak. Email address: [email protected]  Will a lender take issue with assumptions that are too conservative? Licensed to Jesse Spivak. Email address: [email protected] Lender Pushback on Assumptions DISCUSSION Highly improbable for lenders to dispute the sponsor’s assumptions for being overly-conservative. To avoid breaching a covenant, sponsors are setting reasonable expectations that they can reach with certainty. Sponsors are not being disingenuous; instead, they are attempting to operate with a margin of safety (“cushion”). Licensed to Jesse Spivak. Email address: [email protected]  Are all the lenders bidding based on the same collateral pool? Licensed to Jesse Spivak. Email address: [email protected] Collateral Pool DISCUSSION There’s a general understanding amount lenders of what constitutes collateral (but can slightly differ deal-by-deal). In ABLs, the borrowing base is tied to the specific amount of available collateral (e.g., 80% of A/R + 65% of inventory). Inter-creditor agreements define the seniority and relationships between the different debt tranches. Licensed to Jesse Spivak. Email address: [email protected] Projections given to lenders and those outlined in the CIM can often differ significantly. How do we deal with the potential difference in projections? Licensed to Jesse Spivak. Email address: [email protected] Balancing Different Assumptions DISCUSSION Management assumptions are generally viewed as optimistic. Sponsors want to find a reasonable middle ground to bridge this gap. Licensed to Jesse Spivak. Email address: [email protected]  What is the rationale behind presenting a conservative case in relation to covenants? Licensed to Jesse Spivak. Email address: [email protected] Rationale of Providing Conservative Case DISCUSSION Debt covenants are generally set as a multiple of EBITDA on a quarterly basis. Sponsors desire a “cushion” where even if EBITDA were to drop a certain percentage, the covenant would not be broken (i.e., a lower bar/base is better). A higher EBITDA as the starting point means a higher level of EBITDA must be produced to abide by the covenants. Licensed to Jesse Spivak. Email address: [email protected] Can a more conservative assumption result in lower lending rates? Licensed to Jesse Spivak. Email address: [email protected] Potential Impact on Debt Terms DISCUSSION Conservative assumptions are unlikely to result in worse lending terms. If the projections provided were too low, the lender would just say no and not commit to any financing. Sponsors have to understand the threshold of specific lenders and adjust accordingly. Licensed to Jesse Spivak. Email address: [email protected]  How many lenders is it generally accepted as appropriate to reach out to? Licensed to Jesse Spivak. Email address: [email protected] The Right Number of Lenders DISCUSSION Firms will work with 2 to 3 lenders on the lower end, but the majority work closely with 3 to 5 lenders. Relationships with these lenders (and trust) develop over time as both parties learn what to expect from one another. On the higher end, certain sponsors will reach out to 5 to 10 lenders in an attempt to find the best terms. Licensed to Jesse Spivak. Email address: [email protected] Initial Financing Source Indications: Content Deep Dive Content Why Do We Care? Breakdown of the different tranches Want to understand the available Debt Tranches/Size/Leverage (x) of debt and the amount of leverage debt structure(s) and how much offered debt can be raised to fund your bid The interest rates and spreads of the Want a reasonable rate on your debt Interest Rates/Spreads different tranches of debt that is in line with “market” terms Defines when the debt must be Would like to have maturities as far Maturities repaid in full out as possible so we don’t need to refinance/repay Mandatory payments to be made Want to avoid onerous mandatory Mandatory (Amortization) over the life of the debt payments & Optional Repayments Optional payments and repayment Ideally be able to prepay without penalties (if any) penalties Licensed to Jesse Spivak. Email address: [email protected] Initial Financing Source Indications: Content Deep Dive (cont’d) Content Why Do We Care? Financial covenants are ratio With covenants, it’s critical to ensure thresholds that the target company your company has enough cushion to needs to maintain withstand shocks Covenants & Other Provisions Term sheets can include other Other provisions give a preliminary provisions such as minimum equity view on other debt terms contribution, conditions precedent, etc. Fees that the lender will charge for You want to keep fees to a Fees the transaction reasonable percentage of capital raised Licensed to Jesse Spivak. Email address: [email protected] JoeCo Indicative Term Sheet Licensed to Jesse Spivak. Email address: [email protected] Indicative Terms Review Licensed to Jesse Spivak. Email address: [email protected] Is the cash flow sweep pretty typical? Licensed to Jesse Spivak. Email address: [email protected] Q&A: Is a Cash Sweep Typical? Licensed to Jesse Spivak. Email address: [email protected]  Since the financing indication is predicted on a certain valuation, what happens if the purchase price ends up way lower, will the lenders agree to the now-higher-leverage as % of total valuation? Licensed to Jesse Spivak. Email address: [email protected] Minimum Equity Contribution DISCUSSION Particularly for higher leverage situations, some lenders will include a minimum equity contribution provision. If a term sheet is provided but the opportunity arises later to purchase JoeCo at a lower multiple, the original leverage multiple cannot be fully utilized. If the sponsor is right at the minimum equity contribution threshold, an undrawn revolver can still be drawn but there are baskets in the credit agreements restricting how the proceeds can be used. Licensed to Jesse Spivak. Email address: [email protected] Why would a sponsor want to prepay debt? Licensed to Jesse Spivak. Email address: [email protected] Prepayment Optionality DISCUSSION The general idea is the sponsor is trying to deleverage and take risk off the table. From early debt paydown, the interest burden is reduced, making the company less beholden to the fixed interest. In practice, prepayment is less than common. Lenders have begun to incorporate an “excess cash flow” sweep (i.e., force the borrower to paydown a certain % principal using excess cash). Licensed to Jesse Spivak. Email address: [email protected] Prepayment in Theory vs. Practice DISCUSSION There is a disconnect between how prepayment is modeled and how it is done in practice. Companies generally want to hold onto the debt for as long as possible and pay the remaining balance at the very end (i.e., tax savings, cheap source of capital to invest into growth). Licensed to Jesse Spivak. Email address: [email protected]  When you prepay the debt, are you only responsible for the interest up to that point? Licensed to Jesse Spivak. Email address: [email protected] Prepayment in Theory vs. Practice (cont’d) DISCUSSION If you prepay, you’re only responsible for the interest on the remaining principal. Licensed to Jesse Spivak. Email address: [email protected] Business Development Companies (BDCs) DISCUSSION Many private equity firms work with Business Development Companies (BDCs), and these investment companies will lend to PE funds. Historically with senior debt, a borrower can just pay it down without penalty. Non-bank, alternative lenders tend to be more aggressive in their debt terms and can force the borrower to pay a premium for prepayment (i.e., prepayment fee). From a PE perspective, if you’re doing a deal < $1B, it’s usually easier to deal with one counterparty. Licensed to Jesse Spivak. Email address: [email protected] Why do non-bank lenders have a prepayment penalty? Licensed to Jesse Spivak. Email address: [email protected] Prepayment Penalty Reasoning DISCUSSION Non-bank lenders are generally high-yield investors and require higher returns as compensation for the extra risk. If a borrower were to repay the debt earlier, the interest payments would reduce, and the lender receives less returns. Non-bank lenders are much more returns-oriented given their lower positioning in the capital structure. Licensed to Jesse Spivak. Email address: [email protected] What is unitranche debt? Licensed to Jesse Spivak. Email address: [email protected] Unitranche Debt DISCUSSION Traditionally, there would be 1st/2nd lien debt and the borrower would have to go to two different financing sources. Non-bank lenders began to just provide the entire package and customize it based on negotiations. A unitranche debt tranche is a blended hybrid of senior debt and subordinated debt. Licensed to Jesse Spivak. Email address: [email protected] Highly Confident Letters DISCUSSION From both a buyer and seller perspective, committed financing is always preferred as the bank will fund it upon closing. An alternative is a ‘Highly Confident Letter,’ which comes post-diligence by the banks and just means the bank thinks it can raise the amount of capital but is not committing to it (and not backstopping it will be their balance sheet). Licensed to Jesse Spivak. Email address: [email protected] Staple Financing DISCUSSION Staple financing is when the sell-side investment bank can provide some initial debt and the term sheet, but rather than holding onto the debt themselves, they usually sell it to debt-focused hedge funds or institutional investors. Licensed to Jesse Spivak. Email address: [email protected] Appendix: NDA and PA Typical Terms Licensed to Jesse Spivak. Email address: [email protected] THE PRIVATE EQUITY DEAL PROCESS IOI Due Diligence Management Meeting Licensed to Jesse Spivak. Email address: [email protected] Other Seller Considerations DISCUSSION Aside from the purchase price, what will the seller care about in the bid? The purchase price (how much will I get paid?) is clearly the focus. …but what other considerations might the seller have? Aside from the purchase price, the seller cares about the legitimacy of the offer. Can the buyer raise the required financing? The seller is looking for credibility in the bid, as well as checking the sponsor’s reputation and track record. Covenants are less relevant here. A potential buyer may consider its role/level of control in the target company. Licensed to Jesse Spivak. Email address: [email protected] Other Seller Considerations (cont’d) DISCUSSION The reputation of the sponsor is a key consideration. Private equity is a people business – the PE firm is trying to convey that it will be a great partner and easy to work with. Licensed to Jesse Spivak. Email address: [email protected] Are there any nuances to add to the purchase price at this point? Licensed to Jesse Spivak. Email address: [email protected] IOI Purchase Price Range DISCUSSION This is contingent on the quality of EBITDA. The presumption is, if EBITDA is lower than initially given, the purchase price goes down accordingly. The IOI bid is provided as a range since deep diligence has not been done and there needs to be flexibility in case other price-affecting factors come up later. The tighter the range, the more attractive it is to the seller – but this IOI is a preliminary non-binding bid. Licensed to Jesse Spivak. Email address: [email protected] IOI: Purpose, Process, and Role Document Purpose Deal Process Your Role Non-binding letter indicating Deal team constructs a letter VPs: You typically take lead on the range of prices at which that conveys key terms of this process with new your firm is interested in buying the offer. Associates. the business. The sell-side banker and the Associates: Initially, you take Need to convey credible source seller assess the submitted bids the first crack at drafting the IOI of debt and equity financing. to determine which bidders are (often based on previous IOI The letter positions the firm as most credible and the best fit. submission). Over time, you the ideal partner who can close may lead this process entirely. The selected bidders are quickly. then invited to proceed to the next round. Licensed to Jesse Spivak. Email address: [email protected] IOI: Summary 5 to 15-page non-binding letter indicating your firm is interested in the business and willing to pay a price, usually within a certain range. Important elements of a typical IOI often include: Availability of Timeframe Sponsor Funds & Price Range to Close Background Sources of Transaction Financing Licensed to Jesse Spivak. Email address: [email protected] IOI: Content Deep Dive Content Why Do We Care? Background on PE firm and why it Want to position the firm as a credible Sponsor Background would be a great fit for the target buyer with funding and relevant industry experience