Today’s middle-market dealmaking environment is rife with challenges, including fierce competition and rising prices. At the same time, business owners who are overwhelmed by the volume of inquiries from prospective buyers are ignoring calls from strategic acquirers, private equity firms, hedge funds, family offices, bankers and brokers.
In addition, according to industry sources, the percentage of lower middle-market deals that are being sold at auction is increasing. Further, according to a PitchBook report published last year, add-on acquisitions now account for more than half of all buyouts.
It is interesting that a PE firm looking to sell a portfolio company won’t think twice about the decision to hire a sell-side investment banker to help market their business to interested buyers. But that same firm often won’t consider hiring a buy-side firm to position itself and its acquisition criteria in front of hundreds of potential sellers—even when the PE firm has a great story to tell. When nearly everyone has access to money, this can be a critical misstep in today’s environment, especially when an owner is looking to find that unique and special buyer they can work with to reach their goals and protect their corporate legacy.
Yet even as quality, reasonably priced deals have become harder to find, private equity firms have neglected an important resource for sourcing proprietary and targeted deal flow: buy-side advisory services.
With the help of an M&A buy-side adviser, a PE firm can better position itself in front of owners. A good adviser will have a dedicated research team that can develop an exhaustive list of appropriate candidates in a given industry. The adviser’s marketing team will create a custom presentation that showcases the PE firm’s strengths and clearly explains why they’re a good fit for a target. Whether it’s the firm’s operating expertise, product line or services, its industry relationships or its track record, telling an owner a buyer’s compelling story for making a strategic acquisition is a powerful differentiator from other buyers who basically only have financial capital.
In addition to providing a competitive advantage, buy-side advisers will help a PE firm establish a rapport with a seller. Buy-side professionals should have the gravitas, wisdom and the polite persistence to answer an owner’s questions, address an owner’s hesitation, and help them navigate the emotional roller coaster of selling their baby.
A well-executed acquisition search can deliver a substantial increase in targeted and exclusive deals for a PE firm. It can help the PE firm put its best foot forward when communicating its strengths and reasoning, and it can expedite and streamline the process for quickly developing targeted and exclusive deal flow.
PE firms shouldn’t be discouraged in today’s competitive environment nor change their goals. Instead, they should adapt by finding more effective and efficient processes to achieve their objectives. Seeking buy-side advisory services is a good place to start.
Jay Aidikoff is the managing director and founder of Valufinder Group Inc., a buy-side investment bank focused on the middle market. He has more than 40 years of experience and has originated and facilitated transactions valued collectively above $3.5 billion.