The leveraged buy-out transaction lifecycle

A typical buy-out of the target business or group is often subject to a tender process which can be broadly divided into a number of stages. This guidance note outlines each of the following stages:

• • commencement of sale process — informal sounding out of potential buyer interest and preparation and circulation of an information memorandum by the vendor;
• • initial due diligence — the main purpose of due diligence is for the buyer/bidder to gather information about the target business to ascertain any problems (that may require a price adjustment or even determine whether the buyer wishes to proceed with the purchase). Due diligence reports usually include financial, tax and legal considerations;
• • choosing a purchaser and the tender process — the seller is likely to run a tender process in order to work out its preferred buyer. There will normally be several rounds;
• • selecting finance providers — while the seller is trying to select a preferred bidder, the sponsor will be running a process with, and leading to obtaining commitments to fund from, potential finance providers;
• • drafting and negotiation of equity, acquisition and finance documents — these documents may be prepared and negotiated prior to full exclusivity being granted by the seller to the preferred buyer. However, full documents often will not be put in place until after exclusivity is granted;
• • satisfying the conditions precedent — conditions precedent to signing are often documents and evidence that the borrower must provide to the agent (and lenders) before funding can occur. They are often included as a schedule in the facility agreement and are often copied into a separate table (known as a CP checklist). See Conditions precedent on acquisition finance transactions — documents table;
• • signing — signing occurs when the acquisition agreement is executed (which is often with the facility agreement so that the parties know when, and with a tolerable level of certainty that, the funds can be drawn down for the purchase);
• • completion — completion is when the conditions precedent is satisfied (or waived) and completion occurs eg ownership of the target is transferred to the purchaser;
• • syndication — syndication may occur within a few months of funding where other financial institutions take on loan commitments and become lenders under the finance documents. However, it may also occur prior to first funding; and
• • exit — the equity and debt providers will ultimately wish to realise their investments in the purchaser. For debt providers, this should mean repayment of the outstanding balance of their facilities. For equity providers, this means realising on their investment in whole or in part through a sale of the business or flotation on a stock exchange.

See The leveraged buy-out transaction lifecycle.