Private equity firms may acquire portfolio companies in various ways. For example, they may pursue a bilateral acquisition directly with the owners of a target company; they may participate in an auction process; or they may acquire the shares of a public company with a view to taking it private. Note that sellers may pursue multiple options when trying to secure the best possible price for a business.

Bilateral acquisitions

Bilateral acquisition: this is a sale process involving a seller and only one prospective buyer.

Bilateral acquisitions usually start out with a prospective buyer seeking out a potential target and then engaging with the owner of that target (i.e. the prospective seller). The benefit for the buyer of taking this approach is that there may be no other prospective buyers in the picture, meaning there’s a lower likelihood of competitive tension pushing up the purchase price. 

To summarise the process typically followed during a bilateral sale process:

• The prospective buyer will first have to agree and sign a non-disclosure agreement.
• The buyer will typically elicit information from the seller via a due diligence questionnaire. The seller will then set up the data room and give the buyer access.
• The buyer will then carry out due diligence, whilst engaging in a “Q&A process” with the seller. 
  • The Q&A process involves submitting questions about the target to the seller’s solicitors. Where the solicitors do not know the answers, these questions will typically be passed onto the seller’s or target company's management team, although some sellers may also give bidders direct access to the target’s management team at this stage. 
  • The due diligence exercise may involve an in-depth review of the target company’s affairs, or might instead focus only on “red flags” (meaning it focuses only on particularly important aspects of the business and/or material documents such as high value contracts). The nature of the due diligence process will depend on the prospective buyer’s budget, the size of the deal and the level of potential risk.

If the buyer is content with the results of the due diligence, the parties will then negotiate the transaction documents, including any required warranties, indemnities and undertakings.

Auctions

Auction process: an auction process involves multiple “bidders” (i.e. potential buyers) competing to buy a target company. Sellers will typically select their “preferred” bidder based on the price they are willing to pay, as well as the terms they are willing to agree/concede. Auction processes are common in the context of private equity transactions.

Sellers will want to keep a number of bidders involved in the auction process for as long as possible; this maintains competitive tension, which can help them to secure a higher price and better terms. However, as the auction process progresses through multiple “rounds”, the number of bidders will be narrowed down and only a select few will be given access to the data room.

The price and terms offered by the remaining bidders during each round may well change as each learns more about the target company (through gaining greater access to the target company’s documents and employees). Eventually, the seller will select its “preferred” bidder and enter into final negotiations with a view to completing the sale.

Take privates

Occasionally a private equity firm might purchase all the shares of a public company (i.e. a company whose shares are listed on a stock exchange, meaning the “sellers” are its shareholders) and subsequently convert that public company back into a private company. This is known as a "take private".

A take private may be a more attractive option when the equity capital markets drop/are more volatile, as the shares may become available at a price that is lower than the real value of the target company.

Duel-track sale processes

Sometimes sellers pursue a “dual-track” sale process, whereby they commence an auction process whilst also gathering information with a view to floating the company (via an IPO) if the bids received as part of the auction process are not high enough. 

Doing so can help sellers to negotiate more favourable terms with bidders (i.e. prospective buyers) during the auction process, as those bidders will know that the seller is not fully reliant on the auction process to achieve A sale. Below is a high-level overview of the processes followed for auctions and bilateral sales.