It is important for a management team to strike a balance between raising enough finance to grow the company whilst also maximising any value of any retained shareholding and minimising any personal exposure.
An internal audit/due diligence exercise prior to any discussions with PR fund managers prior to any investment will enable any commercial, financial, tax and/or legal issues to be identified by a management team and, if possible, resolved at an early stage before a PE house carries out its own due diligence exercise.
The target company will also need to present itself to the PE houses with detailed financials, including a business plan (ideally using a corporate finance professional who can assist with the preparation of the financials). Once a PE house has been selected, they may do a deeper dive into the financials before issuing Head Terms.
Following the agreement of Head Terms and before any investment is made, the PE house will then carry out a thorough due diligence exercise on the target company.
The thrust of some of this will be driven by the values, investment strategy and investment objectives of the PE house (for example, ESG may play a part), and the extent of it will be to alleviate/mitigate any risks and to ensure there are sufficient contractual protections in place in the transaction documentation (by way of warranty and indemnity protection).
All of these will aim to balance the right type of investment and risk profile with maximising return for their investors.