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Once the initial capital is secured, the search phase, for those who haven’t started it in parallel with fundraising, is a critical period where entrepreneurs actively seek out and evaluate potential businesses for acquisition. However, this phase is not without its challenges. After talking to many searchers in the past few months, we examine here some of the strategies they employ to overcome these hurdles, and try to sum it up:
1/ Deal sourcing, pipeline building & quality deal flow:
Identifying a robust pipeline of potential acquisition targets can be challenging, especially in competitive markets. Moreover, gaining access to high-quality businesses that align with the SF’s criteria can be a hurdle.
Strategy: Entrepreneurs need to leverage their extensive network and industry expertise, conduct market research with the help of trainees, and establish relationships with M&A brokers, boutiques, and small investment banks. Networking with other “intermediaries” such as lawyers, private bankers, clubs of entrepreneurs, family offices, accountants, and industry experts is fundamental to accessing off-market deals and exclusive opportunities. Leveraging technology tools for market research, data analysis, and efficient communication enhances the effectiveness of the search process.
2/ Narrowing down acquisition criteria:
Defining and narrowing down specific acquisition criteria without limiting opportunities is also difficult.
Strategy: Iteratively refine criteria based on market feedback, learn from unsuccessful pursuits, and adapt to changing market dynamics and evolving industry trends. Each target explored is a key to pursuing the ideal deal. It’s a continuous learning process, necessitating adaptability and openness throughout the search process.
3/ Competing with strategic buyers or small private equity firms:
Facing competition from strategic buyers or small private equity firms who may have more resources and a different set of priorities is challenging, but there are advantages when approaching a vendor that need to be emphasized.
Strategy: Entrepreneurs differentiate themselves by emphasizing their commitment to long-term growth and operational improvement, appealing to sellers looking for responsible stewardship. Defending strategically your position by highlighting your intention to continue the legacy, maintain the company’s culture, and protect the team can be an attractive option for entrepreneurs more interested in their legacy than just monetary gains.
4/ Due diligence challenges:
Balancing thorough due diligence with the need for swift decision-making to secure favorable deals is another challenge.
Strategy: Utilize experienced advisors, develop efficient due diligence processes, and leverage technology to streamline data collection and analysis. Balancing all conclusions is necessary to determine if the deal fits even with identified issues.
5/ Managing investor expectations:
Aligning investor expectations, who may be eager for a quick deal, with the unpredictable timeline of the search process, is always a challenge. Will this deal be too big/small for them? Will they like this opportunity? Would they be concerned about the Capex issue or find this sector boring? These are some of the questions you will be asking yourself during the final phase.
Strategy: Transparent and clear communication, setting realistic timelines, and educating investors about the importance of patience in securing the right acquisition. Implicating them from the beginning, addressing their issues, and obtaining their feedback are key for a successful closing. Don’t be afraid to have equity gaps; it’s common, and that’s why talking to a few investors not in your cap table in parallel is essential. Develop and nurture a network of industry professionals, mentors, and advisors to gain valuable insights during the entire process.
The challenges inherent in the search phase of the SF model require entrepreneurs to adopt a strategic and adaptive mindset. By addressing issues related to deal sourcing, due diligence, and investor management, entrepreneurs can navigate the process successfully, positioning themselves for a well-informed and prosperous acquisition phase. Through effective networking, continuous learning, and technological integration, entrepreneurs can overcome challenges and create a foundation for sustainable growth and success in their journey.
