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Private Equity: History, Governance, and Operations, Second Edition by ADAM A. WADECKI, JAMES P. MARTIN, LOUIS W. PETRO, HARRY CENDROWSKI

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Chapter 7

Legal Considerations in Sale Transactions

Richard A. Walawender

Introduction

A private equity (PE) fund does not invest in or purchase a portfolio company with the intent of holding and operating the company in perpetuity. Rather, the PE fund's objective is to exit (i.e., liquefying or cashing out of) its investment in the company at a substantial profit and gain, typically from three to seven years after its initial investment. During that time, the PE fund will seek to maximize the returns on the company. To that end, the PE fund will undertake operational restructuring, add-on acquisitions, divestitures, and other measures with respect to the portfolio company in order to make it as attractive of a potential investment for others as possible at the time of the PE fund's exit.

There are a wide variety of techniques used by PE funds in exiting their portfolio company investments, and other variations depending on what proportion of the company's equity the PE fund owns and controls. But the two most common exit strategies utilized by PE funds involve (1) the sale of the company's stock to the public in an initial public offering (IPO) and (2) the sale of the company's stock or assets to another entity for cash, stock, and debt, in a variety of combinations (the sale transaction). To simplify the analysis, this chapter will focus on the sale transaction model.

When should a PE fund choose as its exit strategy a sale, as opposed to an IPO? Of course, in addition to the ...

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