Lower Middle-Market Deal Sourcing: Here’s What You’re Up Against

Alex Karlsen

Whether you’re a director at a private equity firm, CEO of your firm, or you head up acquisitions in a corporate development role, the landscape for finding a company to buy is competitive.

You’re probably thinking . . . “Of course it’s competitive!”  

But like any competitive marketplace, it can be incredibly valuable to have information that allows you to outperform your competition.  

For nearly 5 years, I’ve been running business development here at CAPTARGET.

It gives me a unique perspective on the greater market.

We help individuals and teams source deals across the lower middle market.  While we commonly help PEGs looking for $1M-10M EBITDA businesses to acquire we also work with internal groups or individuals charged with finding the next “add-on” acquisition to tuck into their company.  

And let's face it. The entire market is creeping downward.

With sophisticated professionals waking up every day to work the phones and do direct marketing to potential sellers, it can be intimidating for any group to compete. 

I have come across all sorts of buyers equipped with all kinds of tools and strategies to maintain a competitive edge. Here are a few stand outs:

  • Private equity groups willing to pay up to 5% of transaction value to finders who source deals on a non exclusive basis. 
  • Corporate buyer with 20+ internal deal team members sourcing and managing acquisitions across the U.S. 
  • A family office that pays any 1099 “finder” a flat $50,000 fee on any deal they deliver that closes regardless of deal value.
  • Private equity groups with a physical presence in every major market they invest in, including business development personnel on the ground. 
  • A PEG who establishes a local footprint in an area & has the BD person live there, get involved in the community.
  • A group who will buy you a car if you send them a proprietary deal.

The list goes on…

It’s unrealistic for most groups to hire multi person dedicated business development staff to go toe-to-toe with buyers who invest heavily in origination (like the buyers I mentioned above).  It’s simply too costly.  

The task then remains squarely on your desk.  And you likely won’t be flying all over the country taking meetings with potential sellers that have a low probability of each resulting in an acquisition.  Nor should you have to constantly manage marketing campaigns and messages to the universe of potential sellers, hoping to “stand out” so they pay attention to you.

It begs the question . . . “So how do we stay competitive?”

CAPTARGET’s deal origination service is designed specifically for buyers of businesses who can not justify the high cost of managing a large scale internal effort, or who have trouble reconciling the high cost of finders fees, particularly with smaller lower middle market deals. 

We offer a scalable managed solution to generating more acquisition opportunities without ever requiring the payment of a finders fee, or without asking you to dedicate internal staff to manage our efforts.  Our focus is simple - to generate more qualified leads while saving buyers money.

In this competitive market reducing total transaction value by 5%, or simply reducing your day to day operating expense of running your sourcing effort can result in significant savings, often to the tune of many hundreds of thousands of dollars per transaction. 

Regardless of how you choose to ultimately source your next acquisition, a few trends I have observed ring true:

  • Lean PE firms with principally led sourcing efforts often struggle to play the ‘numbers game’ of sourcing
  • Middle market corporate buyers often lack the internal support and domain expertise to successfully source companies to buy without having to bear the high cost of working with bankers and/or paying finders fees. 

If costs or simply the ability to manage a scaled process are limiting the success or your acquisition search, we are likely a well fitting solution.

Stay up to date with our best practices in deal origination and more with CAPTARGET insights.

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