An Enterpreneur’s Guide to Private Equity

Every start-up or business dreams of securing funds from angel investors and private equity companies so that they have enough to convert their ideas into the reality. However, a lot of people do not know how to go about it and the whole business of approaching people and pitching ideas is just a basic understanding of the whole process. 

There is a whole lot more that you would need to do as securing funding for your ideas is an extensive and time consuming process. Nevertheless, when you achieve your goal and get that opportunity, your hard work will finally bear fruit! The private equity process is basically an understanding of how a private equity funding is secured and 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.

Originating the Deal

Private equity firms starting finding opportunities that might be investable and start the process of providing the funding, and this method is called deal origination. There are two ways in which this can be done: the first one is proprietary sourcing where the private equity firm approaches the business owner directly and offers its funding. The other way is through auctions. These are run by merger and acquisition advisors who help business owners sell their companies and create a competitive auction between multiple private equity firms, increasing the value of the business with different prospects. These advisors can be individual brokers or bigger establishments like investment banks.

Screening

After the company is identified, that business is subjected to a screening by the firm that will be investing in it. Every private equity firm has a set of investment criteria that they use to screen potential investments. This step allows them to realise if the investment was wise or not and the deal is also put through the investment committee for further verification and sometimes to be absolutely sure about their decision, firms set up multi-step investment committee processes.

Letter of Intent

With the verification and the pre-offer part completed, the company issues a letter of intent. A letter of intent is a document that outlines all the key terms of the deal.  It outlines valuation, investment amount, deal structure and other key terms. It is important to discuss and negotiate all the key deal terms on the front end before a letter of intent is signed. 

Purchase Agreement Notification 

Finally, when the letter of intent has been discussed, the purchase agreement is filed and which outlines all the provisions of the transaction and how the business will run.  The deal is then closed after the purchase documents are signed, and the investment funds are transferred to the entrepreneur’s account. 

The duration of this whole process may take an average of four to six months from start to finish.  This timeline can be sped up or slowed down depending on the needs of the company and how quickly all the background checks, offers and eventual buying is completed.

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Created on Nov 8th 2017 04:09. Viewed 640 times.

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