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The business landscape today is full of activity. 5.4 million new business applications were filed in the US during 2021, beating the previous record of 4.4 million set in 2020 by a whopping margin. Pop culture phenomena like Shark Tank have made the idea of starting a business and hitting it big an all-too-easy endeavor.
For investment firms and venture capitalists, the surge of fresh, investment-ready companies means amazing deals could be right around the corner. And the best among them? Proprietary deals. Let's dive into what proprietary deal flow looks like and best practices for sourcing these opportunities.
Proprietary deals are hailed as the "holy grail" of opportunities in the world of private equity and investment banking. Proprietary deals occur when a single, specific firm has the chance to purchase or invest in a company before any other dealmaker. This usually happens when a company shares a personal connection with a firm, or aligns particularly well with the firm’s investment thesis and sector expertise.
Most often the company isn’t actively searching for investment, and is approached by an intermediary or the firm directly. In many cases, the company is small and privately held or founder-owned with little information about its revenue or operations publicly available. This makes proprietary deals much harder to find than traditional deals. So why is a proprietary deal flow so sought after?
The main benefit of proprietary deal sourcing is the lack of competition within the deal. The more buyers, the more chance for a bidding war to begin and drive the acquisition price up.Since these types of deals happen "under the radar," so to speak, firms often receive a much better price for the company than would otherwise be available.
The other big benefit of proprietary deal flow is the closeness with which firms understand their target company. Because of the more intimate relationship required to make this type of transaction successful, deal cycles are much shorter and firms can learn much more about the business they intend to acquire than in a broad auction format.
With less competition, better prices, closer relationships, and faster closes, the value of proprietary deals is clear. The question is, what's the best method to source them?
Arguably, the point behind a proprietary deal flow is to be the only firm vying for your target company's attention. While intermediaries can be very helpful in finding opportunistic deals,their main tactic to do so is by approaching many firms — the very opposite of the intent behind a proprietary deal flow. So when you're looking to source this kind of a deal, direct deal sourcing should be your preferred method. This will allow you to actively seek out companies that match your investment criteria and give you the best chance of success.
Learning all you can about potential opportunities is the best way to find one that fits your firm's needs. But revenue and operational data for bootstrapped companies, which comprise a large percentage of proprietary deals, is difficult to come by. Fortunately, some M&A technology surfaces key data signals that help firms identify high-growth, investment-ready, pre-transaction companies that align with their thesis criteria. These data signals include employee growth,website rankings, ownership type, and much more.
One way to make proprietary deal flow more efficient is through automation. Set up tracking on specific companies and then automate alerts for important events (such as a CFO hire) to ensure your firm doesn't miss anything. Companies who are looking to raise a round of funding often start to test the waters to see who they know in the investment banking and venture capitalist world, or whether a particular private equity firm is looking to purchase a company like theirs. Or, they may publish a press release or two about their product and their market that is ripe for disruption. Watching for these signals and then being notified of their occurrence immediately can ensure you get there first.
Custom scoring is another way to make your proprietary deal flow more efficient. These models help surface the types of businesses that will be successful investments for your firm based on the rules you create to reflect your firm's ideal fit. While basic models are often included as part of a private company intelligence software and will start you off on the right foot, cutting-edge firms integrate multiple data sources and use data science capabilities to build their own. Ensuring your scoring models are custom to your business will only improve the companies your firm finds, resulting in a healthier and fuller pipeline.
Once your firm has conducted its proprietary deal sourcing strategy and become aware of a potential opportunity, you must work quickly. Remember, the main reason proprietary deals are so sought after is that there are no other competitors to drive up the price. Do everything you can to establish contact early and win over the company owners, founders, and any other decision-makers, such as senior executives. There is a lot of competition in the investment banking world and you don't want your potential acquisition entertaining other dealmakers. Above all, you want to avoid the worst situation possible: your target company seeking out other potential buyers themselves.
The competitive landscape today is tough. You cannot rely solely on the people in your firm or the tools you may have used yesterday to find potential targets. For you to succeed in an increasingly complex and cutthroat environment, you must use all the resources available to you.
Whether you have been lucky enough to participate in a proprietary deal or not, no one can deny their rarity and value. That's why familiarizing yourself with the flow, making your processes more robust and efficient, and knowing what to do should such a deal present itself is so important. SourceScrub’s M&A platform can help make finding a proprietary deal more of a reality. Download our Private Company Intelligence Platform Buyer's Guide today to learn more.