Basic, lesson 1 of 4
How a deal gets screened
A fund looks at hundreds of companies a year and buys a handful. Most are killed in the first hour by a few numbers and a few questions.
8 min, 3 checks
1The auction, step by step
Most companies a sponsor buys come through a sale process run by an investment bank. Each stage narrows the field and asks the buyer for more work and a firmer number.
| Stage | What the buyer gets | What the buyer gives |
|---|---|---|
| Teaser | A one or two page anonymous summary | A yes or no on signing an NDA |
| NDA and CIM | The confidential information memorandum: history, financials, management's plan | A first look model and a screening memo |
| First round bid (IOI) | Nothing new yet | A non binding indication of interest: a price range and key assumptions |
| Second round | Management presentation, data room, expert calls | Full diligence, a financing package, a detailed model |
| Final bid (LOI) | A draft purchase agreement to mark up | A firm price, committed financing, a marked contract |
| Signing and close | Exclusivity, then the company | The equity check |
Check 1
A banker asks for your first round bid. What are you submitting?
Not every deal is an auction. Add-ons for an existing portfolio company and deals sourced by the fund's own outreach skip some steps. Funds like them because there are fewer bidders pushing the price up.
2The first hour screen
Before building anything, an associate checks whether the deal can work at the asking price. Three numbers do most of it: the multiple being asked, how much debt the business can carry, and the equity check that leaves.
Worked example
Can it work at the ask?
- 1EBITDA $50m. The banker guides to 12.0x, so $600m.
- 2Lenders will give about 5.0x for this kind of business: $250m.
- 3Equity: $600m - $250m = $350m, or 58% of the price.
- 4With 58% equity and a full entry multiple, the return has to come mostly from EBITDA growth. The question becomes: is there a credible plan to grow EBITDA by half or more?
The screen does not reject the deal. It names the one question that decides it.
Check 2
EBITDA is $50m, the asking price is 12.0x, and lenders offer 5.0x. What share of the price is equity, in percent? One decimal.
3Reasons to pass early
- Outside the fund's mandate: wrong size, sector, or geography.
- Cyclical earnings at a peak, so today's EBITDA overstates what lenders and buyers will pay for.
- Heavy capex or working capital that leaves little free cash flow for debt.
- One customer, supplier, or contract that the whole business depends on.
- No clear buyer in five years.
Check 3
A trucking parts maker had record EBITDA this year after two years of strong freight demand. The ask is 11x that EBITDA. What is the main screening concern?
Terms in this lesson: Sponsor, Teaser, Confidential information memorandum, Indication of interest, Data room, Letter of intent, Portfolio company, Carried interest, EBITDA, Capital expenditures.
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