How the CAPTARGET Approach Compares to Other Deal Origination Service Providers
May 9, 2023
Professional buyers have a lot options when it comes to piecing together the source of their next acquisition. Here's how to make sense of the options in the marketplace today.
CAPTARGET has been in business for more than a decade, providing cost-efficient outsourced deal origination services for buyers of companies.
Our team has helped thousands of professional buyers or all fund sizes and types source acquisitions targets without ever charging a finders fee or participating in the transaction.
While we are biased to our approach, it’s not the only way for buyers to source deals in 2023.
How to Minimize the Cost of Sourcing a Deal
As you know, each buyer has preferences that align with their economic and operational models.
Still, all share a common goal of trying to minimize the cost of sourcing the next acquisition.
CAPTARGET’s pricing model is unique, with a low monthly cost and no success fees charged. The “hands off’ nature of our service also appeals to buyers who do not have the time, technological expertise, or willingness to pursue conversations with potential sellers on a day-in, day-out basis.
We provide a comprehensive approach to assist firms, allowing them to focus on other aspects of deals in progress, optimizing a ROI on otherwise potentially burdensome overhead costs associated with completing transactions.
Some firms prefer our more thorough approach, but others sometimes choose to retain deal origination services that offer different options that may be more in line with their needs.
Let’s look at the three models business acquisition companies can use, comparing services, costs, advantages, and disadvantages.
Before we start, you should know that these approaches are not mutually exclusive. Many firms choose a single provider and approach. Others prefer a hybrid approach, tapping the strengths and services of multiple providers who focus on different segments of deal origination services.
Managed Service Providers
Of the three models used by acquisition firms, managed service providers offer the widest range of turnkey services to acquisition firms, allowing them to focus on other parts of deals with greater scrutiny and often in a more compressed time frame. This aligns with the culture of private equity firms, which tend to focus on transaction and portfolio management rather than research and outreach.
Most large buyers have a fully functional internal business development team working on generating acquisition opportunities. These teams offer several buyer benefits but at a high and ongoing fixed cost. At a time when cost efficiency and a streamlined business model are at a premium, it makes good economic sense to outsource as many of those functions as possible at a reduced cost. 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.
CAPTARGET is a managed service provider offering our clients Proprietary and Non-Proprietary options. Our Proprietary services involve sourcing acquisition opportunities directly from off-market sellers such as business owners, founders, and other similar situations. Our Non-Proprietary services involve sourcing on-market deals from brokers and sell-side advisors.
Most acquisition firms that focus on proprietary deals do so because they believe the best deals are always off market and, therefore, the most valuable. However, after working with nearly 1,000 clients, CAPTARGET has found that both Proprietary and Non-Proprietary approaches offer pros and cons for buyers.
Proprietary deals are completed without an auction style marketing effort, leading to a greater discount of enterprise value vs. through a competitive process. The drawback is that buyers often deal with sellers who may not be quite ready to sell, which can significantly lower the close rate compared to sell side advisor represented transactions.
Sell side advisor represented deals are more transactional, with timeframes often dictated by the seller. While these deals trade at a higher premium than proprietary deals, the close rate is much higher because sellers are more motivated to complete a deal.
Deal origination is a numbers game and usually requires looking at hundreds of deals before finding one that is financially sound and fits the goals and objectives of an acquisition firm. For these reasons, we advocate for a holistic approach utilizing several lead-producing and marketing efforts.
CAPTARGET is similar to buy side firms, but the most significant difference is that we don’t charge success fees. In fact, many buy side firms white-label our service and upcharge it to their clients.
That makes us an attractive and cost-effective option for clients because we directly generate a higher-level ROI and value for our clients. That’s a huge incentive for bottom-line-conscious firms looking to maximize and effectively manage their acquisition costs.
Part of the way we accomplish this is through email automation. We are experts at prospecting, validating contact information, writing and testing content strategies, and continually curating data during our client engagement. We remove the client burden of vetting data by guaranteeing a high level of accuracy complemented by optimizing the execution of campaigns and utilizing robust tools that increase deliverability, open rates, tracking, and follow-up.
In our outreach, CAPTARGET represents itself as an extension of the private equity firm rather than a third party. That means all sourced opportunities only go to the private equity firm. Ideally, CAPTARGET is the most useful for companies without a business development arm but would like to keep these functions in-house.
The bottom line is that we’re strong believers that quality data at the start produces quality outcomes at the end.
Data Source Providers
Data source providers are exactly what their business model sounds like. Companies such as Pitchbook and CapIQ sell acquisition firms raw data that may include company names, contact and financial information, and other statistical and relevant profile information. However, data providers are a more passive approach than managed service providers. They do not execute actions based on the data they provide. Instead, acquisition firms must still extract value from the data, run their own test emails, build data screens, and perform other similar time-consuming activities.
Using this approach often means firms must buy data from multiple sources to ensure enough coverage to find and execute the best deals. Those costs can add up, leading to inefficiencies and too much time spent on low ROI activities.
Managed service providers like CAPTARGET also find and extract a considerable amount of data. However, the biggest difference is that through our years of experience, we understand how to use that data best and leverage it to produce higher quality results and ROI than a more passive data provider-only approach.
Data source providers usually offer several levels of service, starting with access to technology and database assets, ranging up to in-person networking and client meeting services. Clients go beyond buy side private equity firms and often include sell side parties such as investment banks, advisory firms, and companies that want to raise capital or sell their businesses outright.
These different levels can produce wide cost variations as opposed to CAPTARGET which tends to be more affordable with fees that range from $1,000 to $3,000 per month. Depending on which services a client opts to use, data source providers can run as much as three to four times that amount.
Open Marketplace Firms
Another option is open marketplace firms such as Axial, DealStream, and others. However, since they only focus on active “on market” companies for sale, they miss a huge swath of the acquisition market since many deals are based on finding companies that are quietly shopping for buyers and who prefer a more low-profile approach for many reasons.
An open, free-for-all approach increases competition for attractive acquisitions if you're on the sell side. But on the buy side, it means you could very well end up paying a lot more instead of working with a managed service provider behind the scenes to help identify and structure fair and reasonably priced companies.
Many open marketplace firms rely on technology platforms that match the sell side and buy side parties and their representatives based on mutually shared criteria.
Open marketplace firms have moved toward a percentage-based fee charged at the close. The catch is that because most deals are available to anyone who accesses their platform, most deals become auctions, driving up costs for buyers.
Let’s say a marketplace firm is involved in a $15 million sale. Since a typical transaction fee is 1%, the transaction would carry a $150,000 fee. Instead of a flat-based fee approach, the bigger the deal, the bigger the cost of doing business for the acquisition firm.
The average finder fee paid to middle market buyers was over $240,000, according to a recent survey of CAPTARGET clients.