Top M&A Deal Sourcing Strategies

Discovering the ideal deal sourcing strategy often proves to be the key challenge for investment bankers, venture capitalists, private equity firms, and corporate development teams alike. Deal sourcing, also referred to as deal origination, serves as the cornerstone for identifying and pursuing lucrative investment prospects. Within this dynamic landscape, diverse strategies are employed to enhance conversion rates and drive remarkable returns on investment (ROI).

In this article, we'll go over commonly used M&A deal sourcing strategies, their pros and cons, and what you can do to build a solid M&A pipeline.

The M&A Deal Sourcing Process

The M&A deal sourcing process refers to the steps firms take to identify, research, and connect with potential investment or acquisition targets. Most firms use a mixture of channels and tactics to find the deals that best match their unique goals and domain expertise. After taking stock of your existing M&A deal sourcing process, examine the following strategies to better research, assess, and engage with the right companies.

M&A Inbound Sourcing Strategies

Inbound deal sourcing includes all transactions that come into a firm through its various connections and networks. These include channels such as direct referrals from lawyers or consultants, portfolio member recommendations, and even cold emails from founders.

Investment banks are the most common sources of inbound deals. These intermediaries facilitate deals both on the sell-side and the buy-side by representing companies looking to be acquired, as well as firms looking to invest.

Pros:

• Inbound deal sourcing saves time and resources on the initial phases of the deal origination process.
• Leads are sometimes pre-qualified in some way or have been "warmed up."
• The latest deal origination software is now able to streamline the process of learning about and qualifying previously unknown inbound opportunities "a process that used to take weeks of manual, time-consuming research.

Cons:

• Firms have less control over the quantity or quality of leads that come in.
• Relying solely on inbound deal sourcing makes it difficult to create accurate forecasts and goals since lead quantity and quality is unpredictable.
• It's extremely competitive, since companies that are actively seeking investment are likely to reach out to multiple firms at once, as are sell-side investment banks.
• Inbound deal sourcing largely relies on the size of your firm's network, which may be a challenge for smaller firms or those that are just starting out.

M&A Outbound Sourcing Strategies

Outbound deal sourcing refers to actions a firm takes to proactively uncover and connect with potential opportunities. This type of deal origination strategy involves creating a list of potential, promising leads and then reaching out to them directly. Most firms will have a dedicated team for this approach.

Pros:

• Firms are empowered to take control of the quantity and quality of companies they reach out to, which creates more consistent and measurable deal flow.
• Outbound deal sourcing offers compelling opportunities to identify promising companies earlier on in their lifecycles far before the competition, giving way to a strong proprietary deal flow.
• Teams can focus on finding opportunities that directly align with their or their clients' objectives and investment theses, increasing overall conversion rates.
• Deal sourcing platforms such as Sourcescrub make discovering and researching leads significantly more efficient than it once was.

Cons:

• Finding reliable information about private companies is extremely difficult and time-consuming without the help of the latest deal sourcing platforms.
• Outbound deal sourcing for private equity often takes a backseat when there is an influx of warm inbound leads.
• It requires firms to expand their sourcing skill sets, possibly hire new team members, and build on the traditional inbound approach.

Relationship-Driven M&A Sourcing Strategies

Relationship-driven deal sourcing refers to using your direct and extended network of contacts to discover opportunities. Although relationship-driven deal sourcing traditionally overlaps with inbound deal sourcing, there are key differences.

Inbound deal sourcing refers to all incoming leads, whether they come from existing relationships or unknown founders seeking investment. Relationship-driven deal sourcing involves any inbound or outbound deals that stem from a known network connection.

Pros:

• As Best of Bootstrapped founder Joe Brown of DearDoc says, owners and operators are more likely to take a meeting with you if you share a mutual connection, no matter how minor or obscure.
• A shared network may give way to information that can help firms create more personalized interactions with opportunities, giving them a competitive edge.
• Relationship-driven deals often move faster than other deal types because introductions are warm and made when companies are actively seeking investment or acquisition.

Cons:

• Just like inbound deal sourcing for private equity, relationship-driven deal sourcing is opportunistic and unpredictable, which makes it difficult to build up to a consistent deal flow.
• Just because you share a connection with a founder or executive doesn't mean that their business is the right fit for a firm's investment theme or requirements.
• Opportunities received via inbound, relationship-driven deal sourcing are likely to be highly competitive, since these companies or their sell-side representatives probably reached out to multiple connections at once in their search for funding.

Data-Driven M&A Sourcing Strategies

Just like it sounds, data-driven deal sourcing uses data to pinpoint relevant investment opportunities prior to reaching out to or connecting with them. It's typically used in outbound efforts, and is most effective when used in conjunction with relationship-driven and in-person deal sourcing strategies.

Pros:

• Pre-qualifying leads through research saves firms time by preventing them from putting effort into leads that don't align with the investment theses or sector focus in question. It also ensures higher conversion and success rates and streamlines the M&A due diligence process down the road.
• Data-driven deal sourcing makes it possible to uncover existing network connections and relationships at highly relevant companies. For example, you may discover through Sourcescrub that a particular executive is a decision maker at a target company, making it easy to view people you have in common on social platforms such as LinkedIn to secure a warm introduction.
• Data-driven deal sourcing includes collecting the information necessary to deliver tailored outreach and pitches for each individual account, helping your firm stand out from the competition.
• As firms collect more data, they're able to create custom, automated lead scoring models and other proprietary assets and market insights. These help them move faster and with greater expertise and precision compared to competitors.

Cons:

• Without the latest and greatest technology and tools, you may spend hours manually researching companies, especially when it comes to collecting private company data for smaller or founder-owned businesses, which represent a large portion of add-on acquisitions.
• Not all data service providers are created equal; beware of tools that over-promise artificial intelligence capabilities, as these tools are often plagued by data quality issues.
• With great data comes great responsibility: data-driven sourcing is most effective when firms have a CRM in place to track and organize all of the data they collect.

In-Person Deal Sourcing Strategies

In-person deal sourcing is any lead your firm generates by approaching and talking with a potential investment opportunity face-to-face. The number one method for in-person deal sourcing is attending industry conferences and tradeshows.

Pros:

• Of all the deal sourcing strategies on this list, in-person deal sourcing typically makes the most memorable and lasting first impression with opportunities.
• Face-to-face interactions build trust and familiarity more quickly than digital engagements.
• When used in conjunction with data-driven deal sourcing, in-person sourcing is highly effective. For example, a firm could use a tool like Sourcescrub to identify which trade show attendees align most closely with its investment thesis. It could then brush up on these companies' latest news and accomplishments, and seek them out in the expo hall armed with these insights. This is referred to as a hybrid conference strategy.

Cons:

• Conference networking is highly unpredictable, and making the right connection without any prior planning or research is a game of chance.
• In-person deal sourcing is nearly impossible to scale without adding significant headcount.
• It's time-consuming and expensive, often requiring travel, event tickets, and related costs.
• The COVID-19 pandemic showed us that firms can't rely solely on in-person deal sourcing tactics, and should always have technologies like Zoom in place.

Online Deal Sourcing Strategies

Online deal sourcing is done (you guessed it) online. Firms are relying on online deal sourcing more and more as technology develops and digital transformation takes hold.

Pros:

• Online deal sourcing for private equity and M&A offers firms autonomy and empowers them to seek highly qualified opportunities that align with their own goals.
• It's more cost-effective to conduct research online than in-person, and cuts overhead costs such as paying specialized sourcers for the deal origination process.
• Online deal sourcing can be used to effectively research individuals ahead of in-person meetings and events, making it a valuable strategy on its own or in combination with any of the others on this list.
• Tools such as Sourcescrub make this strategy highly scalable without sacrificing lead quality.

Cons:

• Researching deals online can be tedious and time consuming if you do not utilize the latest and greatest deal sourcing platform.
• Founders and operators are receiving an increasing number of online investment inquiries, making it harder for firms to stand out if they don't take the time to personalize their outreach.
• Without data-driven personalization, online sourcing efforts may come off sterile or cold.
• Online deal sourcing without the help of quality data service providers can lead to inconsistent or outdated information.

Supercharge Your M&A Deal Sourcing Strategy with the Right Tools

Winning in the bidding arena heavily relies on a firm's adeptness in implementing a tailored fusion of strategies that align with their specific goals and competencies. However, irrespective of the chosen deal sourcing methodologies, staying equipped with the most advanced tools is paramount for successful execution.

Whether you're actively scouting top-tier leads, fostering connections between compatible buy- and sell-side clients, or conducting pre-event research to streamline industry engagements, Sourcescrub offers the essential resources to seamlessly orchestrate a robust deal flow, leveraging the optimal practices in each strategy.

To learn more about how leading firms use Sourcescrub to help guide their M&A deal sourcing strategies, download this free guide.

Originally posted on “March 27, 2023”