In Part 1 of this two-part series, the article reviewed the goals of a roofing contractor that would align for sale to private equity.

It also addressed the marketing and positioning of the seller in the best light:

• Preparing the company for sale with a Valuation, Multiplier and Financials
• Marketing the company for sale with a Teaser, NDA, CIM, and targeting PE Buyers
• Contracting Targeting PE Buyers:
• Introduction calls and follow-up questions
• Encouraging an Indication of Interest
• Management meetings

The next step in the progression would be the Letter of Intent.

Part II

Letter of Intent (LOI)

LOI is a non-binding document that outlines the major terms of the offer. It is much more detailed than an Indication of Interest and sets the terms for the ultimate purchase and sale agreement. The LOI will typically include the price, structure, and deal contingencies. This document is the first step and guides the documentation required to close the deal.

Exclusivity: The seller may get several LOIs to review before deciding the party of choice. You then pick the buyer and sign the LOI, which grants the PE firm exclusivity for a period (60-90 days) to complete the due diligence and finalize the terms. This exclusivity agreement locks the seller from negotiating with other buyers during this period.

Due Diligence (DD)

In-Depth Review: This is the period where the PE firm completes a deep dive into the seller’s operational and legal matters, contracts, HR, IT, and financials. The process allows the PE firm to verify all the seller’s claims and risks and find synergistic opportunities for value creation.

Disclosures and Negotiations: The DD process aims to uncover risks and opportunities. Findings during this process may lead to further negotiation and price adjustments.

Final Purchase Agreement and Negotiation

Purchase Agreement: In PE, this can be referred to as a Share Purchase Agreement or Asset Purchase Agreement. This is a legally binding agreement between the parties (buyer and seller) that outlines the terms and conditions of the business sale.

The document details the final terms, such as the payment structure, earnouts, representations, warranties, and post-sales liability.

Negotiating Key Terms: Terms like non-compete clauses, indemnification, and transition assistance are clearly defined.

Closing

Final Approvals: Both parties will review and approve the final documents.

Transfer of Ownership and Payment: On the closing date, ownership is transferred, and funds are distributed according to the agreement. This may also include any escrow arrangements and earnouts.

Post-Closing

Transition Period: Many times, sellers are required to remain post-sales to help transition operations, customer relations, and continuity; this can be a short period of months or several years.

Earnouts and Deferred Payments: The sale may include earnouts (performance-based payments) based on agreed-upon milestones.

One key difference between working with a PE firm and a traditional sale is that a PE firm generally requires the seller to “roll over” a portion of the proceeds into the new entity. The idea is that PE wants the seller to have some skin in the game until it can resell the new company.

Holding time varies, but the typical turnover period is about five years. At this point, the seller can realize additional proceeds or a “second bite of the apple.”

Most PE firms have a buy, grow, and sell strategy where they will purchase several like-kind or complementary companies, grow them, and resell them at higher multiples than initially paid.

In closing, this sales process can last six months to over a year, depending on the deal's complexity and structure.

Your sell-side adviser will possess the professional expertise to drive the sales process, offer strategic advice, and help negotiate a deal that helps to protect the owner’s interests, achieve the best terms, and close the sale for the highest price.