The December 2010 magazine Mergers & Acquisitions (published by ACG) has an article titled, “Where are the Deals?” While this is a study from the private equity industry, it has great parallels to all size deals.
Here are three key things I got from this article.
1. Deals found by the buyer were better companies than those offered via an intermediary. Surprisingly (because creating buyer competition and getting a higher price is a value proposition of selling brokers), a premium was paid for the deals the buyer found on their own. The article speculates this is because the buyers perceived lower risk and a greater opportunity to add value (and thus were willing to pay more).
2. Deals sourced by an intermediary had lower multiples (point one above) and also had, “relatively less attractive realized outcomes.” In other words, you get what you pay for.
3. The authors recommended that buyers (PE firms) setup a proactive, outbound prospecting operation to source deals. This is exactly what we at “Partner” On-Call Network provide our clients; a proven system for finding companies so they can access 100% of the market vs. the small percentage of listed businesses.
A year or two ago a PE firm principal told me that if they pay 4X EBITDA and the company doesn’t grow it’s a bad deal but if they pay 7X EBITDA and it grows like the want it to then it’s a great deal. The above points from the ACG article show that the gems are hidden. You have to do whatever you can to uncover them. While you may not get a “deal,” you will have a much better chance of getting a company you can significantly grow.