The Value of Proprietary Deal Flow
In today’s frothy M&A environment, quality companies are demanding high valuations and becoming quite expensive for buyers to acquire.
While we typically see EV/EBITDA multiples for lower middle market companies of 4.0x – 6.0x, increased demand is driving deal valuations above historical norms.
The good news for buyers is that there is a key strategy for building a pipeline of acquisition targets to avoid overpaying. Acquirers may engage an investment bank to proactively find opportunities with companies that are not actively marketing their business for sale.
Why proprietary deals matter
There are obvious advantages to building a pipeline of proprietary deals as an acquirer.
First, building a pipeline of proprietary deals leads to more opportunities. While it is important to be aware of companies being actively marketed by investment banks, there is a large amount of companies that are willing to sell, but for a variety of reasons have not yet taken the step to engage in a sale process.
The exclusive nature of proprietary deals leads to minimal competition among buyers. The process leads to one-on-one negotiations between buyer and seller, whereas in a broad auction process, sellers can leverage multiple buyers against each other to create a bidding war. In the current competitive M&A environment, in which there are far more buyers than sellers, it is nice to have the leeway to negotiate freely.
Another benefit is that, during these one-on-one negotiations, buyers can work directly with the Seller’s management team as opposed to an intermediary. This can speed up the process of information gathering and developing a deeper relationship between the parties.
How it works
Developing a proprietary deal flow strategy begins with a meeting with a buy-side advisor.
At Copper Run, we truly get to know our clients: the ins and outs of the business, their strengths, and perhaps what could be improved. Most importantly, we want to know what is fueling the ambition to acquire: expanding to a new geography? Adding new products or services? Once there is a clear picture of the buyer and their needs, we go to work finding opportunities.
Copper Run has a dedicated team that scours the universe to find companies that fit specific criteria that our buyer is looking for. Many of the targets are small and privately held companies with limited information publicly available. Copper Run uses industry leading resources that specialize in non-Public companies to ensure that the information we are gathering is as accurate as possible. Our ability to uncover opportunities that are hidden from other strategic and financial buyers creates an advantage for our clients.
We work directly with our clients to develop a message that we want to communicate to the companies that we reach out to. We create customized marketing documents that introduce our client, explain their acquisition strategy, and convey our reason for contacting them. Copper Run meticulously follows up with all the companies we reach out to on behalf of our clients in order to drive as much activity as possible. In one recent engagement, Copper Run identified over 400 acquisition targets and introduced our Client to 31 companies that expressed interest in an introduction.
At Copper Run, the vast majority of our buy-side deals have been proprietary.
With significant experience, we perform all list gathering, outreach efforts, introduction calls, and data gathering of targets that have been approved by our clients. After an initial robust pipeline of proprietary deal targets is built, Copper Run continues to procure new opportunities, manage outreach, attend industry events, and assist in facilitating conversations and requests on behalf of buy-side clients.
Copper Run utilizes industry-leading resources to help develop acquisition strategies and identify targets that meet a buyer’s criteria by accounting for industry, size, geography, and scope.
Today’s M&A environment has left many acquirers frustrated by a lack of opportunities and soaring valuations. An experienced buy-side advisor can bring unique opportunities to your company through a pipeline of proprietary deals.
Jason Kraynak is Vice President at Copper Run. He focuses on assisting families and privately held business clients in their growth through acquisitions and in meeting their liquidity objectives.