When I had a very inquisitive company trying to grow through inorganic growth as a strategy, we had to keep a big pipeline, and it was a company that had not done that in the past—filling that pipeline with a challenge.
I always think about the origination of sourcing as understanding what you're trying to get to and then backing into having a good deal funnel.
The adage, you've got to kiss many frogs, definitely applies in the M&A context for the buy-side.
You have to look at 120 targets and get them through a funnel to prioritize those targets. Then you have to approach those targets and turn that into an offer, including the timing.
Then you go into different levels of diligence and then get into negotiations and hopefully get down and you pass all of these stage gates and get your internal approvals, and it's still strategically aligned.
Tracking your pipeline
It's all about prioritizing your targets and using metrics. You do need to find a way to kind of force rank the targets. Otherwise, you're just shooting in the dark or taking a shotgun approach, which in my experience, is not a great way to have successful acquisitions because then you're not driven by strategy.
- Is this a market that we're trying to get into?
- Is this a new sales vertical?
- Is this a new geography?
- What is the market size?
- What are the market growth rates?
- What is the profitability of the sector?
- How does the target fit within that market?
- What is the revenue size?
- What is the growth rate?
- What is the profitability in the marketplace?
- How does that fit with your strategic goals?
- How does the target fit with your company?
- How does the target fit with your strategy?
- How does the target fit with your market position?
- Are they aligned with your sustainability goals?
- How do they align with your innovation goals?
- How difficult is it to integrate the company?
- What are the positive synergies?
- Are they going to add value to us? Or are we going to add value to them?
- What are the negative synergies?
- Do you have the same customers?
- What is the manufacturing or sales geography?
- How many employees and offices do they have?
- How many products do they have?
- Is this going to be a bolt-on, asset, or stock acquisition?
- What is the ownership structure? Is it single ownership? Is it a subsidiary? Does it have 150 holders who might not have the same view on selling the business?
- Is acquisition the right path to achieve the strategic goal? Or is a joint venture enough?
Balance on Funneling
It depends on the volume, and there are other factors.
When we're in these roles, we all feel which company is going to be a good fit, and it's going to fly through those stage gates, and which ones are more of a stretch. If you're thinking of bolt-on acquisition, then it's much more straightforward because these are companies that you probably already know well.
If you're thinking about adjacent markets and want a new platform to build off for your long-term success, you can spend money on outside consultants to help you identify those spaces where there are niche markets that meet these growth profiles.
There are lots of people you can pay to give you a big target list, but you've got to sort through those things because they're not all going to be the right fit. You have to use metrics to force rank those targets.
And when you get to the top five, then the gut comes into play—gut backed by data.
The further away from the core that the acquisition target is, The more you'll benefit from considering the areas that I just described.
Removing deal fever
I don't feel like I do anything specific. But you always have to be the neutral party within an organization. We are the professionals who understand M&A we need to tie it to good decisions and help provide the information that allows executives to make informed decisions, not perfect decisions, but informed decisions and keeping a neutral view on that.
Resources to identify targets
We have used buy-side advisors to help do scans of spaces in new markets, like a platform play or new geographies where we might not know all the targets out there.
I think one of the things in lots of spaces, especially if you're looking at a new niche space that you've done enough research to know is that it meets your metrics for growth profitability ability to win in that space.
But there could be many small companies, and the ability to know all those companies has gotten better over the years. Going online and searching will identify more than you used to.
So when I started this, you definitely would benefit from folks in that market that you could pay to help you identify the targets.
You can do a little more of that internally, but sometimes I still think you'd benefit from getting that buy-side help to populate your pipeline.
Different software packages can track targets. The limitation is that it's easy to attract public targets. It might be a little easier to attract those owned by private equity because there's more publicly available information that's out there just from announcements.
When you get to smaller privately-held companies that might be family-owned, and if you get into other jurisdictions worldwide, it gets even more challenging.
And that's where you need a balance. If you want to find niche players with some interesting technology, I think you need to dig a little deeper.
I will caveat all of this with a couple of things. One, I think it's not a one-size-fits-all. Everybody's got to figure out their personality and how that fits. And a lot of the things I'll probably talk about are geared towards the middle market space. Two large public companies acquiring each other is an entirely different challenge.
So with the lens of the middle market and companies that are maybe owned by a family that started it or an entrepreneur who started it, sometimes private equity-owned things. That's kind of where I'm going to focus on.
I think it all still starts with soft sales skills, to be honest. These basic rules of how to engage somebody you've never talked to you before all come into play.
And these are the types of skills that get better with experience. Everybody can be successful in this space.
Obviously, you can throw a bunch of money at something, but getting good deals and finding these hidden gems or convincing someone who hadn't thought about selling is always what you hope to do.
Because that's the proprietary source to go when you're a strategic acquire avoids going through an auction process where you're one of the many bidders, and you're going to go through those too, but that's not the best way to get the best deal done in my opinion.
So the first thing I'd like to do in a company is to figure out, does anybody already know them? Maybe our CEO knows, or maybe a senior executive knows, or somebody else has a contact there and can work their way up.
Corp Dev's role is to make this a professional approach. One of the worst groups to go into a company to reach out is the sales team. One, they tend to talk more. It's also a group that probably might be the most nervous about an acquisition.
So it's the wrong team to have any view that there might be a discussion going on. Talk about keeping things confidential later. So finding the right avenue to keep things quiet and get directly to the decision-maker is what you want.
And that doesn't necessarily mean the president of the company. If it's owned a hundred percent by a family, you need to talk to the family. The president doesn't make the decision to sell, and the president just works for them as an employee. The owners of the company get to decide whether they sell. So you need to figure out a way to get that conversation going.
When I don't have a natural contact, whether it's a connection through LinkedIn or somebody at the company who already knows them, the next thing would be to try to do some online research and find those owners and see what I can figure out and decide the best way to approach them.
I have used one approach to go through my outside counsel who knows their outside counsel. Going in through a trusted source is an excellent way to get an introduction.
You have to be creative and intelligent. Sometimes you have to use a business party to get inside the company, and having a softer touch introduction coming from a business party can be to your advantage.
It's all about purposely doing your outreach, not just random outreach and sending blind emails, especially when you're dealing with companies outside of the U.S.
Gathering all the publicly available information, just like an interview, you expect the candidate. In this case, somebody interested in your company to have researched your company that's available online.
So I always task the team and myself to find every publicly available information. So I don't walk in there blind. This is all about the purposefulness of your approach.
Suppose it's a culture I've never dealt with. In that case, I'm going to see if it's one that I feel like a complimentary of something that I've done in the past, or that might be the time I want to choose to have a buy-side advisor in that geography, in that country, help me make the introduction because they're going to understand the cultural norms better and be able to make sure I'm on my best foot forward when the introduction does happen.
If you want to throw the biggest check in the world at something, people will always listen. Everything's for sale for the right price. That's not normally the best way to acquire a company has to spend way more than you need to. So you need to approach these things and look like the best suitor in that situation.
It's about building trust. I can't emphasize that point enough and I feel that the most successful M&A practitioners know how to quickly build honest trust, not insincere, like, used car salesman, old average trust.
I'm talking about like, they honestly believe that you're interested in their company and what they do and the possibility of a beneficial acquisition or relationship, or maybe it turns into a joint venture or a commercial relationship or collaboration.
Those are all things that they need to feel comfortable with because they're going to be sharing information, and you want them to share information to feel comfortable doing that. In an excellent world, sometimes before an NDA, but definitely after an NDA, and not be scared that you're just using this to get competitive information or that you're not a serious buyer.
That's a big problem when you don't have trust in the marketplace or you can't build trust with ownership of a target.
I was with a company with a reputation in the marketplace that they were a serious buyer. All they wanted to do was go under NDA and get competitive information but would never put in a serious offer.
So when I came to that company, I had to rebuild that perception in the marketplace as a serious buyer. It takes a lot of in-person relationships, and you have to communicate your strategic goals, so they want to do a deal with you. You need to prove it, and actions speak louder than words in that situation.
Do you network with PE firms?
Yes, there are plenty of times when we didn't hear about a deal, but the good thing with private equity is they usually have a strategic goal to monetize that acquisition within that five to a seven-year timeframe.
So there are plenty of times that I reached out either through the investment banker who had done the deal that we happen to know, or didn't know, or directly to the private equity firm and said, Hey, great that you guys do this, congratulations, I hope it's successful. when you guys are looking at exit, I want to be your first call.
Let's stay in touch, but that has been helpful to get a first look at things at times because their job is to monetize that asset overtime after they get to the right point within their investment plan.
And obviously, having buyers in the wings is a better way to approach it. And maybe for some that couldn't avoid extra fees because you build it up and you save time on diligence, and you've already got a view on value, and you can align early, and it's a better deal for both sides.
So everybody wants their lives easier. We had the same thing on the other side where I had private equity reached out to us saying; we have this asset, this is something you'd be interested in. So I mean, everybody in that space is doing it that way because that's the best approach.
The commercial team in the sales team is always a good source of targets. I always try to collaborate with them because they should track the spaces you're playing in.
If you have a big R&D shop, they tend to run across new technology. So if you're looking to make a technology play, maybe it's the R&D team or the innovation team that's got the best pulse on the market to know who's out there and who's up and coming.
Maybe they're working with universities and there's an incubator there and there are things that you should be looking at there. And that might prompt you to make an early investment into the incubator itself to be in play when that company is ready to come out of the incubator.
So it's being proactive rather than reactive is key. I usually never buy deals in auctions because it's not the best way to get the best price.
Making yourself available in the most convenient way for the other party is best. Always make it easier for the target, and introducing yourself as corporate development helps. If you think you're just someone trying to sell them something, they will dismiss you.
First outreach has evolved over the years. It would have been phone calls only back in the day. Email still isn't my favorite. But sometimes it's a note. But all I ask for is a call. And keep that initial call briefly, so you are respectful of people's time.
I don't approach it with size, and I think you have to approach it with humility with a sincere interest in what that company is doing. Most people who own or run a company are interested in telling people about the company they own and run anyways.
And there are times when it turns into something, and there are plenty of times that it turns into nothing. But sometimes, timing is everything. The important thing is to know each other so we understand how we can help each other, even if it's in the long run.
We should all ask ourselves, why do we trust anybody we'd meet for the first time? It's no different when you're meeting somebody for the first time. Some people seem superficial, some seem pushy, and others seem engaged.
It's as simple as looking them in the eye, not checking your clock or checking your emails, and it's basic person-to-person conversations and asking questions and letting them talk and listen.
So if you can get them to talk, if you can build the ability that they believe you're sincere and you're not wasting their time, you can get to the next meeting.
In the next meeting, you have an opportunity to build more trust. And then the next meeting after that, you build more trust. Do what you can to avoid breaking it, and that turns into a long conversation about what they're trying to achieve.
During this whole time, you're taking in the information because that goes back into does this target needs to be prioritized? If not, let's lower them on the list. We'll keep them warm. My job is to keep them warm until it might be time to push forward.
Don't start by saying you want by the company tomorrow. That sets an expectation that if you can't live up to. Because then you're going to have to go through your diligence and you would likely find issues that you're going to raise and start telling them why their business is not as good as they think it is. That's not a good approach in my experience.
The sales team needs to track their contacts, who talked to what, when, how, and who you talked to? What was said? And make sure that you're recording conversations. So it doesn't get lost, and corporate development teams can have higher turnover.
People move into bigger roles in the organization or move on to other teams, and you can't have all that knowledge get lost every time somebody leaves. It's not a good way to keep these relationships warm and keep a good understanding of who these people are or the target.
And that includes keeping up with people leaving the target. So if you wrote it down one time and then a year later, you go back, and they don't answer it, you know you're getting a rejection.
You can track all these in an Excel spreadsheet.