Have all your documentation in order

Documenting your strengths in the areas that PE investors – and other types of investors – will likely focus on during a deal negotiation process should be a continuous effort. One that starts very early in your company’s lifetime.

One of the things that often comes as a surprise to software companies when entering into negotiations with a PE firm is the level of granularity of their questions. These questions can cover areas such as financial, legal and tax issues, as well as existing business processes, future earning perspectives, risks and much more. The maxim on preparing for tomorrow, today most definitely applies to getting documentation ready ahead of time. The same applies to the preparation of the data that PE firms will request and how to safely present it to them in data rooms, business summaries, legacy tax documentation and other formats. 

PE investors will be focused on how your company will make use of the capital they provide in connection with a deal. Key focus areas include how the funds will help you grow revenue, boost your R&D and give you access to new markets. Their focus comes from wanting – and needing – to know what steps you will take to grow your business and thereby enable them to make a good return on investment. 

Questions and focus points can include areas that your company may not have considered. For example, you may face very detailed questions regarding the potential value created through non-financial activities such as corporate responsibility and sustainability programmes. Your business’ debt capacity is another area that you may not have previously explored in the level of detail that PE firms are likely to do during negotiations. 

Preparing documentation for all the areas mentioned above can be a simultaneously arduous and novel task, in that most companies will not have experience with it, nor know what level of documentation PE firms are likely to request. An almost unavoidable fact is that your documentation will not have the required detail level in all areas at the start of negotiations. However, minimising the number of areas where documentation needs to be updated has many positive side-effects, including ensuring minimum disruption to the day-to-day running of your company during negotiations, as well as heightening PE firms’ confidence in your management team. 

At the very minimum, most companies will need several months to prepare everything from scratch. If your company undertakes the task on its own, the required time will likely be longer.