23 May Deal Origination: Perhaps the Most Difficult Component for All Mid-Market Operators
Those in the financial sector who work at buying, selling and investing in various stages of companies will all tell you the same thing when it comes to the difficulty in their jobs: deal origination and deal sourcing is perhaps the most difficult aspect of their jobs. M&A advisors are always looking for that perfect company to sell while the buy-side folks are intent on doing the same thing, only to enhance their proprietary deal flow. All firms have the same difficulty. They’re all looking to effectively scale the number and quality of deals that flow in and out of their practices each year. This is true regardless of firm size. Everyone is looking for new deals and better flow.
The struggle on the buy-side is that it’s a real seller’s market right now. There is too much capital chasing too few deals that being the only one to the trough when an opportunity hits, let alone the first to the trough, doesn’t matter today. We’re seeing more M&A auctions–even among financial buyers. With the supply/demand economics of most deal opportunities completely out-of-whack, it makes it difficult to find the good deals that don’t already have at least three other interested players. This bodes well for sellers and their intermediaries, but provides complete annoyance for the private equity groups and family offices looking for a good place to put their financial capital.
The sell-side can often be just as fierce, but for different reasons. The potentiality of all the baby boomers retiring has bolstered the market for sell-side investment bankers and M&A advisory firms all competing on the same turf, for the same deals. Increasing the supply does have the effect of decreasing the costs inherent in transactions and M&A fees, but
One thing is for certain, the only constant in life and in business is change. And the sands are changing quickly, especially when it comes to how both buy and sell-side opportunities are sourced and deals are done. This is true from both a deal origination standpoint and a deal structuring standpoint. Here are some ways operators in the mid-market may be using technology and media to network themselves into the next generation’s deals:
- Online and social media. Search will continue to play a much bigger role in how deals are sourced, massaged and closed. We have a partner firm here in the Pacific Northwest who just closed a $5M EBITDA firm from a warm lead they obtained through the company’s website. Linkedin will also play a key roll in both buy and sell-side deal origination and deal sourcing opportunities. It’s true that larger organizations benefit greatly from enhanced scale, but smaller companies can use advanced media for creating a very powerful network effect without requiring a large number of warm bodies. That’s at least one of the reasons I blog so frequently.
- Crowd funding and crowd sourcing. While there has been a great deal of hype about crowd funding and the JOBS Act (including JOBS Act 2.0), the dust really hasn’t settled in terms of all the regulation and operation of equity-based crowd funding, at least not yet. Whether you think it’s a good idea or not, it will certainly have an impact on the way businesses are bought and sold in the private market. In fact, it could turn traditional finance on its head as capital is democratized further. The verdict is still out, but my guess is that deal origination will become easier, but a whole host of other issues will be introduced which will cause a complete re-think of how we do things.
- Outsourcing and off-shoring. While both have negative connotations, scale at an affordable cost is often gleaned through using outsourced and offshored labor. While the financial services sector may be difficult to truly engage because of the complex nature of transactions, the one-on-one needed support, it doesn’t meant that warm leads can’t be had through such channels and that deals can be sourced this way. Getting the deal done properly is a different story, but automation on the front-end for the sourcing will eventually be easily outsourced with things like Avatar dialing systems combined with advanced CRMs and marketing automation.
While noting beats your personal network and the “who you know” approach, the winds are certainly changing when it comes to overcoming the difficulty in sourcing deals and opportunities on both the buy and sell-side of the deal. What are some other ways M&A deal sourcing is changing the way we operate in the world of finance?