Best Targets Are The Ones Not Seen

Shortage of Quality Deals Above the Waterline

by Terry Stidham, President of Target Search Group

 

It has been said many times that “It’s Faster, Smarter, and Cheaper to buy than to build”. Mergers and acquisitions is one of the most effective aspects of a corporate business development strategy to help an enterprise grow. The challenge today is how or where to find the businesses to buy or invest into. 

How many times have you said or heard it said, “If we had known that company was for sale we would have bought it or at least tried to buy it" or "Why aren't we getting more targets to look at"? 

The fact is that the vast majority of business owners who would like to sell don’t want it known on the street that they are for sale. The business owners would prefer for a premium or strategic buyer to identify who they are, prove that they have the intent and means to buy and then to enter into serious discussions as to what they would like to accomplish.

 

Simple enough, Right?

 

I often get requests for my advice on something along these lines; “Our Company is looking to grow through acquisitions. I have used business intermediaries and we have an in-house person or team that is tasked with finding companies. What other options are available to us? We are not getting enough of the “right deals” to look at without too many strings attached. We have very specific requirements as to the size and geographic service area of the company we would be interested in purchasing. Efforts so far have not had very many positive results. Any suggestions or help would be appreciated.”

Strategic Buyers, Private Equity and VC firms are all faced with the challenge getting enough of the “right deals” to look at and to ultimately buy or invest into. The “right deals” are the ones that are aligned with the investment objectives that fit the strategy, size and focus of the investor.

 

Having spent the last 15 years sourcing deals, I can tell you that without a doubt that there is no shortage of quality companies to buy or to invest into. Below the waterline is where one has to go to find them. The outlook for targets to acquire looks extremely good as the baby boomers, who currently own over 60% of the businesses, continue to seek an exit in increasing numbers. 

 

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Warren Buffet to his share holders in 1989

 

The Majority of Deal Flow is being sourced from:

• Brokers or Intermediaries
• Web Sources
• In-house Business Development Teams
• Networking
• Referrals

This may be adequate for the very large players that have dedicated resources to source, review and scrub enough opportunities to meet their investment objectives. The numbers and the amount of dry powder tell us that for many this is simply not the case. Most strategic buyers and investors that are looking to grow through acquisitions may at best have a person or two that is assigned with the task of sourcing deal flow.

 

Abundance of capital (dry powder) to invest as of Q1:

• Approximately $900 Billion with private equity firms 
• Strategic Buyers (non-financial companies) with over $1 Trillion 

“Insanity is To Do the Same Thing Over and Over Again and Expecting Different Results” often attributed to Albert Einstein

 

Investors that are not meeting their acquisition/ investment objectives need to initiate or increase their Business Development efforts - either through in-house efforts or outsourcing it to a business development and deal sourcing specialist firm.

 

Advantages are exponential for the following reasons:

• The Deal is Typically Un-shopped
• Majority of the Quality Deals are Below the Waterline
• Avoidance of the Auction Process
• Committed Sellers
• Quicker Closings
• Confidentiality is Easier to Maintain
• Less Time Wasted on Deals that are Unaligned
• More Cost Effective

Successful business development to source proprietary acquisition/ investment opportunities involves being able to:

• Speak the Language of Both the Buyer and the Seller
• Segment Markets
• Identify Targets
• Establish Lines of Communication
• Gather Base Level of Information to Determine Suitability
• Get Level of Understanding as to Owners Initial Expectations

Call or contact me with your questions of comments.


About the Author:  Terry Stidham is a Sales and Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment. He has served as the head of entrepreneurial organizations as well as Fortune 500 companies. He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions. Mr. Stidham has instructed thousands of business owners on how to prepare for a successful exit. He improves operational efficiencies leading to significant increased value.

Here Come the CVC's

Corporations Dive In With CVC's by Terry Stidham

An increasing number of our corporate clients are setting up an in-house CVC team. The Corporate Venturing Capital (CVC) community recently had a US conference, where nearly half of the 450 represented organizations present had set up a corporate venturing arm during the previous five years. The remainder of the group is planning to set up a unit within the next 12 months. 
 

Corporate Venture Capital (CVC) - CVC as a subset a venture capital whereby a company is investing, without using a third party investment firm, in an external start-up or early stage venture that it does not own.
 

Corporate Venturing refers to when a company supports innovation and new projects internally. It is defined by the Business Dictionary as the "practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.
 

The London-based, Global Corporate Venturing magazine ranks CVCs and sees funds with $billions available, some (such as Google) investing $300+ million per year. Deal volumes vary from just one to over 80 per year.

In the last two years, more than 200 corporate venturing units have been launched. In 2011, over 500 corporate venturing units globally invested more than $26 billion, which is similar to private VCs at about $28 billion.

CVCs are on the way to becoming more important in providing venture capital than VCs. These figures omit business angels, who provide, worldwide, $20 billion or so.

Some will argue that this trend is cyclical, but Corporate Venturing is definitely on the ascendancy in this decade and for good reasons. Venture Capitalist funding has declined as exits are scarce and raising new funds is difficult. Despite the global problems of the last half decade, businesses in whatever stage of their lives still need funding, which may come from various sources such as customers, loans, grants and equity.

The big challenge for both VCs and CVCs with or without an internal business development team is sourcing quantity and quality opportunities that are aligned with their investment strategy, criteria, and focus.

Companies find it easier and less costly to buy innovation than to develop it in-house. This is due to a mixture of the agility of smaller organizations, the ability for a small company to motivate and reward high caliber people and the freedom from corporate structure and processes. 

There is a significant difference in the return calculation between the two funding classes. 

1. Private VCs - Measured by financial return (although a small minority also use social enterprise metrics). 
2. CVCs - Measured by an organization and even deal-specific mix of financial and strategic return.

This doesn't mean it is any easier for an investor to steer through the negotiation and due diligence process (and in fact it may be tougher, as some corporations impose internal investment processes on external opportunities), but it does mean that, if the strategic fit works, CVC money may be available where VC money is not. In addition, many VCs have time-limited funds – commonly five years to invest followed by five years to divest. Most CVCs do not have these pressures.

Both VCs and CVCs need to see a minimum monthly recurring revenue before taking it further. However the VCs then would dig deeper into the financial numbers, whereas the CVC would first look at how their own product and channel infrastructure could help with scaling their business.

Early stage or growth stage companies that are seeking $1 million plus in funding should put one or more CVCs on their list. It's important to understand the strategic aims of those CVCs before approaching them. If CVC money is available it needs to be determined if it would prevent other similar corporations from becoming customers and/or potential acquirers. 

Contact us today to discuss your needs or interests.
 

About the author Terry Stidham
Terry Stidham is the founder and principal of Target Search Group. He is a B2B Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment.  He has served as the head of entrepreneurial organizations as well as Fortune 500 companies.  He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions.  Mr. Stidham has been instrumental in aiding thousands of business owners prepare their businesses for eventual sale by teaching them how to maximize efficiencies in operations leading to significant increased cash flow.

Target Search Group (TSG) is a business development firm that works with a select number of private equity investors and corporate clients to source and originate investment opportunities that fit their size, focus and strategy on both a generalist, opportunistic, and a specific search basis. 

TSG sources acquisition and investment opportunities throughout North America in companies that range from startups to businesses with revenues up to $500 million.