Why Your M&A Advisor Should Use Online Deal Sourcing
There are some common objections about online deal sourcing, but it is an important tool for completing middle market M&A transactions.
Disclaimer: Divestopedia has developed a deal sourcing tool that is offered at no charge for all qualified mid-market M&A participants. Register here.
In the last two years, there has been a proliferation of online deal sourcing platforms where M&A intermediaries can exchange information on buy side or sell side mandates. These platforms have improved the transparency and openness involved in the sale or purchase of a middle market business.
Despite this change, however, much of the industry is still rooted in many traditional practices and some M&A professionals are reluctant to use these online tools as a method of sourcing buyers or sellers.
The 4 Most Common Objections About Online Deal Sourcing
When selecting an M&A professional, the question regarding how the intermediary will source buyers should be asked. Many traditional M&A advisors will dismiss the notion of posting their deal online. Here are the top four most common objections you're likely to hear.
1. "Our firm has an extensive buyer network and we create customized buyer lists for each mandate."
Our Take: Finding buyers is a very fickle process. So, even if an investment banker has the perfect buyer in his/her network, the timing for that buyer may be wrong. And finding the right buyer at exactly the right time is key to closing a deal. Plus, it's pretty hard to believe that any investment banker's network could be so deep that they know every buyer for every deal all the time. That's why we view online deal sourcing as a complimentary tool for investment bankers. However, it does not preclude the investment banker from creating a customized prospective buyer list. Limited auction processes will be less prevalent as it becomes easier to source buyers online. As great dealmakers already know, an M&A professional's ability to close deals should be prized above his/her ability to find buyers. This will become even more apparent as online deal sourcing is more widely used.
Our Take: Would you rather have your M&A advisor a) turn away multiple requests and ultimately land on the most qualified buyer, or b) receive limited interest and offers with less-than-desirable terms? Qualifying all inquiries from potential buyers is what you are paying for when you hire an M&A professional. When selling a business, more interest is better than less.
Our Take: When using an online deal sourcing platform, the most confidential information (i.e. the name of the company being sold) is not required to complete the deal listing. The primary information required to match a buyer with a seller is a description of the industry, size (by revenue and EBTIDA) and location. This is the same information that is provided in a teaser. The only difference between that and an online deal sourcing platform is the method of distribution. Online deal sourcing will not reduce the risk of confidentiality breaches, but the risk it poses is similar to that posed by traditional sourcing methods.
Sometimes, we have found that intermediaries are concerned about maintaining confidentiality about the deals they are working on as well. Maybe they are worried about their competitors finding out what is keeping them busy. Most deal sourcing platforms allow the investment banker to remain anonymous, therefore alleviating the concern of revealing too much.
4. "Only deals that have been picked over are marketed online."
Our Take: Yes, there is definitely the perception that deals shopped online are story deals with lots of "hair." Online dating had the same stigma in its infancy. It has since become a common - and very successful - form of matchmaking. The truth is that many credible financial and strategic buyers are using deal sourcing platforms as avenues to find deal flow. As previously mentioned, the use of an online deal sourcing strategy will supplement their efforts in a sell side (or buy side) process. As younger, tech-savvy M&A professionals move up the ranks, the use of online sourcing will increase and its stigma will fade.
Should M&A Professionals Use Online Deal Souring?
As our disclaimer indicates, we are undoubtedly biased in this debate. However, the fact remains that M&A professionals are embracing online deal sourcing at an accelerated rate. In fact, we believe that the question of whether to use online deal sourcing will cease to be a question at all in a few years, and using online platforms will just become an everyday part of the M&A business. A more important question to ask, therefore, is what characteristics should a suitable deal sourcing platform have? Here are some of our thoughts:
- Simplicity. Deal sourcing platforms are tools for distributing opportunities via a wider channel. The role of the advisor is still crucial to completing transactions. So, platforms that hint at the idea of disintermidiation should be avoided.
- Inclusivity. Deal sourcing platforms should not restrict access or information for legitimate participants. That said, there should be a screening process to ensure that registrants are qualified.
- Traffic. The medium for distribution is only as good as the volume and quality of the members. Be sure to understand the number and demographic of users on the platform.
- Breadth. The type of opportunities included in a specific deal sourcing platform should fall within a relatively narrow range. Venture capital, main street and mid-market deals all attract different buyers. Be sure that the platform selected is appropriate for your deal type.
More about Divestopedia Deal SourceDeal Source is a tool for M&A advisors, private equity firms and strategic buyers to post their mid-market sell side listings or buy side mandates. We offer the tool at no charge for all qualified mid-market M&A participants. The listings are restricted to high-quality, mid-market businesses with a minimum of $5 million in revenue or $1 million in EBITDA. For those skeptical about why we offer it at no charge, Divestopedia is an online publication that generates revenue from advertising. We feel that charging a subscription fee to Deal Source would limit the number of participants and would make it less effective than it would otherwise be. We aim to assist in the completion of as many middle market transaction as possible. Period.
Join Divestopedia Deal Source here.