The Definitive Guide to the M&A Pipeline

Sourcing & Origination
Private Equity
Investment Banking
Last updated:
May 5, 2022

You've seen the headlines: a major private equity firm invests in a little-known start-up at a $1billion valuation, and a new unicorn is born. Or X company agrees to acquire Y company for $Z million, and the news sites are buzzing with the possibilities.

2021 alone saw $5.9 trillion in global M&A volumes. But how did those mergers and acquisitions actually happen? What does an M&A pipeline look like? Let's dive in.

What Is an M&A Pipeline?

An M&A pipeline takes different forms depending on the parties involved and, perhaps most importantly, how efficiently they approach M&A deal flow. A lack of deal flow process and formal stages is one of the top mistakes your firm can make.

The entire process begins with determining an acquisition strategy and deal sourcing, or determining what kind of company to purchase or merge with and identifying appropriate opportunities. It then moves to making initial contact and negotiating the deal. Perhaps the most important step of the M&A pipeline is then conducted: due diligence.

Once any potential challenges with the deal have been surfaced and addressed and both parties have approved moving forward, the deal can move into the penultimate step: the actual transaction. Finally, once the deal has closed, the parties can begin the most difficult stage in the M&A deal flow: integration.

To understand more about the entire M&A framework, let's explore each stage in more detail.

What Are the Steps in the Average M&A Pipeline?

Step #1: Acquisition Strategy and Deal Sourcing

Before your firm can entertain the idea of a merger or acquisition, the right company has to be found. Combining or acquiring businesses is a monumental feat and one that must be undertaken carefully and strategically. So it makes sense that the first step in the M&A pipeline is determining your acquisition strategy. Some important questions to answer are:

  • Is there a particular sector or sub-industry you specialize in?
  • How will this purchase improve your current standing? Does it fill a hole in your firm's portfolio? Or maybe it complements another of your holdings?
  • How is the company to be purchased performing financially?
  • What does its competitive landscape look like?
  • How well does the company—not just its product or service, but also its culture and business strategy—fit with yours?

Once you’ve answered these questions, it’s time to identify investment-ready targets that meet your firm’s criteria. This is easier said than done, especially if you’re searching for founder-owned businesses, which typically have very little revenue or operational data readily available. Fortunately, M&A deals no longer happen solely via back channels and cocktail parties.

The latest M&A technology like private company intelligence platforms make it easier than ever before to pinpoint relevant opportunities based on signal data like employee growth and current job openings. Firms can then build lists of top companies to actively pursue, rather than waiting for a chance introduction.

Step #2: Contact and Negotiation

Once the right company has been found, the M&A pipeline moves into its next step: making a connection. As the old saying goes, "first impressions count," so ensuring the deal starts on the right foot is paramount. Part of this step is also to assuage any founder or executive fears and begin setting expectations.

Building a foundation with trust and transparency helps to smooth the years-long road ahead of you and may prevent any future "cold feet." It helps to understand everything you can about the opportunity before the first conversation, which is why the first step of the M&A deal flow process is so important. Data around a recent conference a company attended or a new hire the team made allows firms to personalize their outreach to show they are paying attention and already “invested” in the company’s success.

After the first connection is made, the two parties share any initial required data and undergo the negotiation and offer process. This stage is also when planning for integration, the last step in the M&A pipeline, begins. As we'll discuss later on, integrating data alone—not to mention syncing processes, aligning culture, and more—will take a large effort from both parties.

Step #3: Due Diligence

When negotiation has concluded and an offer is accepted, due diligence begins. The due diligence step is where confidential information is shared between the two parties: financial records, personnel contracts, and more.

But business is messy and business data is often disorganized and dirty. According to research, nearly 8 in 10 businesses struggle with data quality. So when your firm needs to uncover any challenges with a potential deal, know that it's going to take time and effort. This is why it's important to understand the entire M&A framework, be strategic about each step, determine a set process, and encourage open lines of communication.

Missteps here can mean the failure of the deal (or worse, the discovery of issues after close). Plan to take at least a few months in this step alone to ensure all parties are confident about moving to the next—and perhaps the most exciting—stage in the M&A pipeline: the transaction.

Step #4: Transaction and Closing

Once all parties are satisfied and all legal requirements are met, the actual transaction can take place. This is where contracts are executed, documents are signed, and cash exchanges"hands." While some may believe this is the last step in a merger or acquisition, it's actually the penultimate stage, leaving, unfortunately, the most tedious work for last: integration.

Step #5: Integration

While integration usually begins post-close, as we discussed earlier, this isn't when it's first planned. Integration can take even longer than the entire M&A deal flow, spanning years afte rthe deal closes. It takes time for acquired companies to adopt specific technology stacks, team structures, financial models, and other strategies that firms or parent companies may require.

Being transparent with all involved parties—stakeholders and employees alike—throughout the entire process can help to solve a lot of problems before they start. Mergers and acquisitions can be scary for those who weren’t “in the fold,” and the question of “how does this impact me?”is top-of-mind for employees. It’s not uncommon for high attrition rates during this final stage,but good planning earlier in the process can help minimize these issues.

Embrace the New School of Dealmaking

While it is certainly an endeavor, nothing quite beats the accomplishment that a successful M&A deal provides. And it all starts with finding the right opportunity.

Leading firms are taking control of their M&A pipelines and streamlining the deal flow process by embracing direct, data-driven deal sourcing strategies. Learn more when you download this free five-step playbook for new school dealmakers.

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