The Buy-Side Process: Screening, Approach, Valuation and Financing

A disciplined buyer starts from strategy, screens a long list of targets down to a few, and chooses whether to approach a company directly or join a seller's auction ^[1]. It values the target several ways, converts enterprise value into an equity purchase price, and lines up financing whose conditions match the purchase agreement's, often through SunGard-style limited-conditionality commitments ^[1][4]. Approaching public companies brings disclosure and filing rules, such as Schedule 13D above 5% ownership ^[6].

From strategy to a target list

The buy-side process begins well before anyone is called. A buyer first writes down what it is trying to achieve: a product it lacks, a customer segment, a geography, a technology team, or scale in an existing line. Those goals become screening criteria such as revenue range, growth, margin profile, customer concentration, ownership and likely availability. Corporate development teams or advisers then build a long list, often dozens of companies, and narrow it to a short list of companies worth approaching.

Good screening also tests the alternatives. For each short-listed target, the buyer should ask whether building or partnering would achieve the same goal more cheaply, what the integration would require, and whether an antitrust overlap or foreign-ownership issue could make the deal slow or impossible. A target that looks cheap but cannot clear review, or cannot be integrated, is not cheap.

Proprietary approach or auction

Buyers find deals in two basic ways. In an auction, a seller's banker runs a competitive process with a confidential information memorandum, indications of interest, management meetings and final bids ^[1]. In a proprietary deal, the buyer approaches a company that is not formally for sale; Akerman's materials note that proprietary deals usually have no CIM unless an earlier process failed, and move directly to a letter of intent and exclusivity, with diligence staged across industry, quality of earnings and legal workstreams ^[1]. A buyer in an auction can sometimes try to preempt the process with an offer strong enough to end it early ^[1].

The first approach to a private company is usually a conversation between principals or through an adviser, followed by a non-disclosure agreement before any confidential information changes hands. If the parties are competitors, the FTC has cautioned that some information of interest, such as current and future prices, strategic plans and costs, may be competitively sensitive, and that the parties remain independent businesses until the merger closes ^[8]. Its staff recommends sharing the least information needed for diligence and using third-party consultants or clean teams when sensitive data must be exchanged ^[8].

Valuation: triangulate, then bridge to equity

Buyers rarely rely on one method. A discounted cash flow analysis values the target's projected cash flows at a cost of capital; a comparable-companies analysis applies trading multiples of similar public companies; and a precedent-transactions analysis applies multiples paid in past acquisitions. Damodaran lists leaning on transaction and exit multiples, and setting the price first with valuation to follow, among what he calls the seven sins in acquisitions ^[2]. He also notes that the value of gaining control depends on how much the business could be improved by being run differently ^[3].

In middle-market private deals, the headline price is usually expressed as enterprise value and then adjusted. Akerman describes the most common approach as a multiple of EBITDA, plus cash, minus debt, minus company transaction expenses, and plus or minus closing working capital compared with a target net working capital figure ^[1].

Worked example: from multiple to equity check

• Adjusted EBITDA of $25 million × an 8.0x multiple = $200 million enterprise value.
• Add $5 million of cash; subtract $40 million of debt and $3 million of the seller's unpaid transaction expenses.
• Closing working capital comes in $2 million below the agreed target, so subtract $2 million.
• Equity purchase price paid to the sellers: $200 + $5 − $40 − $3 − $2 = $160 million.
• Uses of funds for the buyer: $160 million to sellers, $40 million to repay the target's debt and, say, $5 million of the buyer's own fees, for $205 million in total.
• Sources of funds for a private equity buyer: perhaps $110 million of new acquisition debt and $95 million of sponsor equity.

The example shows why buyers and sellers argue about definitions as much as multiples. Every dollar that is classified as debt, a transaction expense or a working-capital shortfall comes off the equity price dollar for dollar, so the definitions in the letter of intent and purchase agreement matter as much as the headline figure.

Financing commitments

A seller wants to know the buyer can pay. Akerman lists the sources and availability of funds, including debt and equity financing, among the terms a letter of intent addresses ^[1]. Financial buyers in particular rely on debt: Kaplan and Strömberg describe a leveraged buyout as funded with a relatively small portion of equity and a relatively large portion of outside debt ^[5]. To give sellers confidence, buyers obtain commitment letters from lenders before signing.

Osler explains that SunGard or certain-funds provisions are common in commitment letters for large and middle-market U.S. acquisition financings, and that they limit the representations the borrower must make at funding to certain specified representations and, in secured financings, the delivery of certain collateral at closing ^[4]. By limiting the conditions to funding, these provisions increase deal certainty by aligning the financing conditions with the closing conditions in the purchase agreement ^[4]. A seller comparing bids should therefore look at financing conditions, not just price.

Approaching a public company

Buying shares of a public target before announcing a deal triggers disclosure rules. Under SEC Rule 13d-1, a person who becomes the beneficial owner of more than 5% of a covered class of equity securities must file a Schedule 13D within five business days after the acquisition, unless it qualifies for the shorter Schedule 13G ^[6]. The SEC shortened the initial Schedule 13D deadline from 10 days to five business days in amendments adopted in October 2023 ^[7]. A stake can also require Hart-Scott-Rodino notification: the FTC's guidance applies the 2026 size-of-transaction threshold of $133.9 million to voting securities acquisitions, using the example of a $135 million voting securities acquisition ^[9].

Because of these rules, most strategic buyers of public companies negotiate with the target's board rather than accumulating a large stake first. The public-company lesson later in this course covers tender offers, proxy statements and board duties in detail.

Key terms

Long list / short list

The broad set of potential targets produced by screening, and the much smaller set a buyer decides to approach.

Proprietary deal

An acquisition negotiated directly with a target that is not running a competitive sale process.

Preemptive bid

An offer made during an auction that is attractive enough for the seller to end the process early with that bidder.

Enterprise value

The value of a company's operations to all capital providers, before adding cash and subtracting debt to reach equity value.

Net working capital target (peg)

An agreed normal level of working capital; the price is adjusted up or down for the difference at closing.

Commitment letter

A lender's written commitment to provide acquisition financing on stated terms and conditions.

SunGard (certain-funds) provisions

Commitment-letter terms that limit funding conditions to specified representations and certain collateral deliveries, aligning financing with the purchase agreement's closing conditions.

Schedule 13D

The SEC beneficial-ownership report required within five business days after a person crosses 5% of a covered class of equity, unless Schedule 13G is available.

Check your understanding

Sources

1. [1]Akerman LLP, “Private Equity Mergers and Acquisitions, Session 1: Acquisition Process,” March 24, 2021.
2. [2]Aswath Damodaran, NYU Stern School of Business, “Valuation, Session 24: Acquirers Anonymous – Seven Steps Back to Sobriety (lecture slides),” Fall 2016.
3. [3]Aswath Damodaran, NYU Stern School of Business, “Session 12: Loose Ends in Valuation II – Acquisition Ornaments: Synergy, Control and Complexity (lecture slides),” Accessed November 2026.
4. [4]Osler, Hoskin & Harcourt LLP, “Is SunGard coming to a Canadian deal near you?,” May 27, 2016.
5. [5]Journal of Economic Perspectives (American Economic Association), “Leveraged Buyouts and Private Equity,” Winter 2009.
6. [6]Legal Information Institute, Cornell Law School, “17 CFR § 240.13d-1 – Filing of Schedules 13D and 13G,” Accessed November 2026.
7. [7]U.S. Securities and Exchange Commission, “SEC Adopts Amendments to Rules Governing Beneficial Ownership Reporting,” October 10, 2023.
8. [8]Federal Trade Commission (Competition Matters blog), “Avoiding antitrust pitfalls during pre-merger negotiations and due diligence,” March 20, 2018.
9. [9]Federal Trade Commission, “New HSR thresholds and filing fees for 2026,” January 20, 2026.

Educational content only — not legal, tax, or investment advice, or an offer to sell or a solicitation of an offer to buy any security. Rules and data are described as of November 2026 and may change. Securities offered through Umergence LLC, Member FINRA/SIPC.