Reasonable minds differ on whether the U.S. economy is in or heading for a recession.
Either way, the economy still feels like a recession and that has left an imprint on the private equity business, according to Phillip B. Martin, co-chair of the Private Equity & Investment Management Practice Group at Fox Rothschild. Martin works with companies generally in the middle market, which means companies with a purchase price of less than $500 million. The middle market has been a little less affected by the economic winds than have the mega deals, he said.
“But uncertainty [in the market] increases the time it takes to get something done.”
One of the trends lately is that buyers are doing a lot more diligence, which could be because there are fewer deals, Martin said. “Buyers are really diving in to the inner workings of the company, what the economy means for its future. They want to get their arms around as much of the unknowns as they can.”
On the other hand, however, Martin said, for a sale of a good company, there is pretty fierce competition and the buyers might have to move faster and take risks to get the deal done.
The due diligence process is a necessary evil to most sellers, Martin said.
“It almost becomes a fulltime job and they have to run their company. We take as much of the heavy lifting [at Fox] as we can.”
That process starts with an investment banker that will prepare a confidential information memorandum, or CIM, which describes the company and its future in 25 to 100 pages, Martin said.
The banker starts looking at buyers, who receive a “teaser” based on the CIM. They may ask for the full documents. All the documents are placed in an online repository where buyers can review them.
The buyers may then seek more information. Ultimately, buyers and sellers meet and receive management presentations.
Then there is an auction where a winning bidder is selected. There is a period of time before closing where the seller agrees not to talk with other buyers, and then, if all goes well, the deal closes.
The process is akin to litigation discovery, said Martin, but friendlier.