Deal Origination Cost Comparison
January 24, 2022
Professional buyers have several options when choosing a path to originate a deal. Which is best? What are the costs? Here's a revised look at deal sourcing partner "types" and how they may fit for you.
Buyers of businesses come in many forms - committed funds, sponsors, corporate development arms of established businesses, family offices etc.
Each of these buyer types gives preference to certain economic and operational models based on their unique needs. But, given the opportunity most buyers would prefer to minimize the cost of sourcing their next acquisition.
Below we take a look at the various deal sourcing solutions available on market, their pros, cons, and costs.
Buy Side Firms
While historically most buy side firms have charged a retainer averaging $5K/mo or more, many are moving to a success fee only model. These fees range from 2-5% of transaction value. Buy side firms often present a value add as an expert in space or having a network that otherwise can not be tapped.
The challenge with the conventional buy side model is this - buy side professionals generate lead flow for their firm, not for their client. This means that when opportunities present themselves, the firm chooses which buyer sees the deal, often based on fee structure and probability of close.
Oftentimes, the buyer that pays the most, sees the most. The buyer does not build brand value in the space, nor do they benefit from the pipeline long term. When the buy side firm is no longer engaged, the deal flow ceases.
In a recent survey of our clients - the average finder fee paid to middle market buyers was in excess of $240,000.
Two Sided Deal Marketplace
A number of deal marketplaces have appeared over the last few years that charge a percentage based fee charged at close, typically lower than that of a buy side firm.
These marketplaces are great for sourcing on market deals and building relationships with intermediaries. Since no off market deals can be sourced through a platform, and since users tend to get out what they put into these marketplaces, they can be a good tool in the quiver but require a user to extract the value. Additionally, all deals are available to all (or at least most) participants on the platform, which means every deal is involved in an auction process.
1% of transaction value is a common fee charged at close from two sided markets - A 15MM transaction would carry a $150,000 cost at close.
Internal Business Development Team
Most large buyers have a fully functional internal business development team working on generating acquisition opportunities. These internal teams provide significant benefit to the buyer, at a high fixed cost. Buyers receive the benefit of proprietary deal flow, long term lead flow from a relational network, and typically have minimal additional costs at close.
Building even a small business development team of professionals can exceed 1MM in annual cost quickly. Salaries, benefits, overhead, travel and trade show participation are the primary costs carried associated with an internal team.
Should the team be productive there are often real arguments as to the cost effectiveness of this strategy. However, if the acquisition volume of the buyer is modest or the team is not successful, the costs can significantly outweigh the possible benefits.
Even a single professional with an acceptable tooling budget can carry a fixed cost of 400K+ annually.
Fee For Service (CAPTARGET)
CAPTARGET offers a ‘best of both worlds’ solution to buyers looking to mitigate costs while accessing both on and off market deal flow. CAPTARGET conducts outreach to targets and the entire intermediary market as an extension to each client. This way, a target is presented the buyer's brand, not an intermediary. This small difference means that when a target responds to a solicitation they are responding to and only to that specific buyer. Each buyer owns their leads exclusively and pays nothing outside of a small monthly fee - typically ranging from $1500-$3000 per month.
As a managed service provider, CAPTARGET does all the work from building prospect lists, drafting email copy, managing systems, solicitations and reporting. The team’s job is to deliver qualified warm leads to a buyer - what the buyer does from there is up to them.
CAPTARGET effectively replaces the work done by a buy side firm at a fraction of the cost while providing access to both off and on market deals exclusive to each client.
View case studies of how CAPTARGET clients have closed deals at a fraction of the costs of traditional fee structures.
Only the service provided by CAPTARGET reduces cost, providers both on and off market deals owned exclusively by each buyer while minimizing the workload required by the buyer.