How to approach your search: pursue a proprietary deal flow vs. engage with M&A brokers

In the realm of SF acquisition, entrepreneurs often face a critical decision: whether to pursue proprietary deal flow or engage with M&A brokers. Traditionally, the role of a searcher was to unearth the perfect company after an exhaustive search process: contacting thousands of potential targets, studying hundreds of companies, meeting with dozens of business owners, issuing LOIs on several targets until the final acquisition. One of the common issues with this method is its timing: a lengthy, frustrating process, and sometimes very complicated because the future “seller” may only want an estimate of their company’s value and end up wasting valuable time for the entrepreneur. That’s why many searchers have opened up to the possibility of searching for a target via an M&A broker, and in many markets, this method is the most commonly used. Each avenue presents its own set of advantages and inconveniences, shaping the trajectory of the acquisition process and ultimately influencing the success of the venture.

1/ Proprietary Deal Flow:

Proprietary deal flow entails sourcing acquisition targets through direct channels, bypassing intermediaries such as brokers. This approach offers distinct advantages. Firstly, it provides an air of exclusivity, granting access to deals that may not be widely circulated in the market. This exclusivity can confer a competitive edge, allowing entrepreneurs to explore opportunities under less competitive pressure.

Additionally, proprietary deal flow can potentially lead to lower costs. Without broker involvement, who always tend to maximize the price of the transaction, entrepreneurs may also evade hefty fees associated with acquisition transactions, preserving valuable capital for post-acquisition operations and growth initiatives.

Moreover, the direct interaction facilitated by proprietary deal flow fosters relationship-building between the entrepreneur and the seller. This personal connection can yield invaluable insights into the target business, paving the way for more informed decision-making and potentially more favorable deal terms: negotiation is more flexible, the seller may be interested to reinvest in the deal, importance of his legacy and preservation of the team, etc.).

However, proprietary deal flow comes with its own set of challenges. Firstly, the reach of such deals may be limited, constraining the pool of available opportunities. This limitation necessitates a proactive and exhaustive search effort, consuming substantial time and resources.

Furthermore, the quality of proprietary deals can vary significantly. Entrepreneurs may encounter businesses facing undisclosed issues or operating in sectors with limited growth potential. This necessitates thorough due diligence to mitigate risks and unearth the true value proposition of the target business.

And it’s also really important to set up as soon as possible indications to the sellers regarding the potential EBITDA multiple to prevent wasting time with incompatible price expectation (as he doesn’t have an advisor, his pretension can be totally out of the market).

2/ Broker Assistance:

Alternatively, entrepreneurs may opt to engage with M&A boutiques, who specialize in connecting buyers with potential acquisition targets. This approach offers distinct advantages, notably access to a diverse range of opportunities. Brokers leverage their networks and market expertise to identify and present a multitude of businesses for consideration, broadening the scope of potential acquisitions.

Moreover, broker assistance streamlines the acquisition process, enhancing efficiency and reducing the burden on entrepreneurs. Brokers facilitate initial introductions, coordinate due diligence efforts, and provide invaluable insights into market trends and valuation benchmarks.

Additionally, brokers can offer negotiation support, leveraging their experience and industry knowledge to secure favorable deal terms. This expertise can be particularly advantageous in navigating complex negotiations and maximizing value for the acquiring party.

However, engaging with brokers entails certain trade-offs. Firstly, the competitive nature of broker-represented deals can drive up prices and intensify competition among potential buyers (including industrials who generally are willing to pay more). This heightened competition may erode the negotiating leverage of the entrepreneur, potentially compromising deal terms.

Moreover, broker fees represent a significant consideration. Entrepreneurs must factor these fees into their acquisition budget, as they can substantially impact the overall transaction cost.

Furthermore, relying on broker assistance may diminish the personal connection between the entrepreneur and the seller (which is quite the opposite of the SF model). This reduced rapport could impede the depth of insights gained during the due diligence process, potentially leading to unforeseen challenges post-acquisition.

In conclusion, the choice between proprietary deal flow and working with intermediaries hinges on various factors, including the entrepreneur’s risk appetite, resource availability, and market dynamics. While proprietary deal flow offers exclusivity and cost advantages, broker assistance provides access to a wider array of opportunities and professional support throughout the acquisition journey. Ultimately, a judicious blend of both approaches may optimize the search process, maximizing the likelihood of identifying a suitable acquisition target and facilitating a successful transition into ownership.