How Sourcing Deals Has Changed as PE Goes Down Market ($2MM EBITDA and Below)

Alex Karlsen

Most private equity buyers are aware of the down market investment trend in our industry.

What was once a common $2MM EBITDA floor is now often $1MM or less.

Deal flow scarcity, coupled with an influx of new buyers, has even driven some of our clients to dip into the $700K EBITDA range for add-on acquisitions.

This trend has implications on how deals get done, and the tools needed to source.

What happens when buyers move down market?

Sourcing smaller deals requires a different approach, including different tools and partners needed to be successful.  

As transaction size gets smaller a few important elements of the deal making process change.  These include:

Hefty buy side fees become less attractive.

In this new environment, all of the associated deal costs including cost of sourcing become more impactful to overall transaction value.  When paying a premium for a smaller company, adding 1-5% in sourcing fees to the purchase price just doesn't make sense. 

Deal quality lessens.

This means the look/offer/close ratios for deals are much less desirable.  To combat this buyers need to build or buy deal flow mechanisms that can scale to help offset the decreased quality that comes with buying down market

Buy side firm incentives become less aligned.

Buy side firms can sometimes have less incentive to prioritize smaller searches - fees, especially fees credited against retainers, can get very small very quickly.  If you’re paying for sourcing help, it’s important to work within a structure that gives your specific campaign priority.

Using internal resources gets less attractive.

The value vs. cost conversation of building or scaling an internal sourcing team gets more difficult to justify.  

How CAPTARGET positions itself as a solution.

The demand for our 'fee for service' sourcing model, which requires no payment of finder's fees ever, is quickly becoming the choice of large and small firms alike who are shopping down market.  

Our origination sourcing model allows for buyers to pay one flat monthly fee for bespoke, active deal origination.  It ensures a tightly-focused sourcing process that uncovers opportunities directly from business owners that can be hard for other origination services to find.

Since we are not a deal platform, we do not warehouse deals or play matchmaker.  Our clients pay us to find them deals, specific to their mandate criteria and we deliver.

Our clients close deals, and pay less in fees.

We save our average client nearly $250K per year in fees all while providing them a scalable, custom solution that looks and fees like an internal origination effort.

For more, review our services and contact our team here.

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