HOW TO MANAGE PRIVATE EQUITY TRANSACTIONS EFFICIENTLY

November 18th, 2014

TOP 10 SUGGESTIONS

RICHARD EPSTEIN | Montreal

This article provides a checklist of best practices/suggestions that, in an ideal world, could be followed depending on the deal-specific circumstances, to help manage acquisitions by private equity firms efficiently (particularly in terms of timing and professional fees).

1. Appoint lead decision-maker. From the outset, appoint one person to act as the lead decision-maker who calls the shots and directs the members of the acquisition team.

2. Confirm the responsibility of each team member. Determine the role and scope of responsibility of each of the acquisition team members and communicate this to all at a kick-off meeting.

3. Clarify the protocol for communications.

3.1 To the extent appropriate, limit the inclusion of acquisition team members (both internal and external) to the meetings, calls and emails that are relevant to them, to avoid tying them up and slowing down the process. Each acquisition team member should focus his interventions on creating value.

3.2 Those in communication with the Seller’s team need to circulate information to the appropriate acquisition team members on a timely basis.

3.3 Communication between the acquisition team and its legal counsel (internal and external) needs to be constant, 360 degrees in scope and two-way. This will enable team members to be up to speed and reduce inefficiencies (e.g. information getting lost along the way, people working on tasks that are no longer relevant, etc.).

4. Prepare an articulate Letter of Intent. Articulate in the LOI as many of the key deal points as possible, bearing in mind that the LOI forms the foundation for the purchase and sale agreement.

5. Determine the transaction structure. Fundamental points to be determined at the outset include deciding (a) whether the transaction is an asset or a share acquisition, (b) whether it is a contemporaneous sign and close or a signing with a subsequent closing, and (c) who the parties to the transaction are, and depending on the corporate structure and jurisdictions of operations of the Target, whether there are multiple Buyers or multiple Targets/Sellers. These points drive the nature and scope of due diligence, the drafting of the purchase and sale agreement, the ancillary documents required to implement the transaction and the professional resources required to assist the parties (M&A, tax, employment and other specialty advisors from relevant jurisdictions).

6. Orient the Seller. Do what can be done to organize and orient the Seller once the LOI is signed so that its resources are used efficiently, in collaboration with the Buyer, so as to meet the Buyer’s top-ranking priorities and timing. Set a deadline for having all (or the bulk) of the due diligence information uploaded in the virtual data room. Ensure the Seller understands the resources it will need (due diligence staff, accounting/financial executives, local and foreign legal counsel and other experts, etc.) to deliver what is required of it by the Buyer.

7. Organize Due Diligence. Determine the scope of due diligence to be carried out based on (a) the relevancy of the due diligence information available, (b) the scope of the reps and warranties and indemnification provisions in the purchase and sale agreement, and (c) the purchase price holdback, escrow and earn-out to be paid post-closing. Confirm the scope of due diligence to be handled internally by the Buyer and externally by outside counsel, and the form of reporting on due diligence.

8. Manage the Purchase and Sale Agreement.

8.1 Avoid reinventing the wheel and commence with a model purchase and sale agreement to be used over and over as the starting point for each deal – one for an asset acquisition, another for a share acquisition based on the asset purchase agreement. Build the provisions of the model agreements with jurisdiction-neutral generic reps and warranties to reduce the need for adaptation according to where the business of the target is carried on.

8.2 Limit the number of drafts of the purchase and sale agreement to spare the time it takes firstly to prepare multiple versions and secondly to have the deal teams of both parties review each draft. One way to do this is to establish the protocol that requires the recipient of a draft agreement to identify and settle with the other party the key issues before it prepares the next draft.

9. Use deal documents that are harmonized. Using deal documents that are harmonized with each other and prepared as a set will result in efficiencies for both parties.

9.1 Harmonize the LOI with the purchase and sale agreement so that the key provisions of purchase and sale agreement are addressed in the LOI (purchase price and working capital or other adjustments thereto, holdback/escrow, earn-out, conditions for closing, timing for closing, etc.).

9.2 Harmonize the due diligence checklist with the disclosure schedules required from the Seller for the purpose of the representations and warranties in the purchase and sale agreement, so that the same information fulfills both requirements. This will also simplify the Buyer’s review of the schedules to the purchase and sale agreement as the disclosure will have already been made to it for due diligence purposes.

9.3 Harmonize the closing agenda with the purchase and sale agreement by developing a model closing agenda that correlates with the model purchase and sale agreement.

10. Manage the deal using a Critical Path. A critical path document should be created and updated regularly that lists key actions to be taken or matters to be completed to get to closing, specifying the person responsible for each matter together with a due date and a status column. This is a useful project management tool to keep track of the status of matters and to communicate the status to the transaction team of each party.

The points listed above are not necessarily new to experienced dealmakers however they may nevertheless be useful to be considered at the beginning of each transaction.