Letters of Intent - The End-Days of Proprietary Deal Sourcing?
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This post is speculative and, rather than relying on any data, is based on some ideas I’ve developed about the sourcing channels for small business acquisitions over the past few years, how they seem to be changing, and some guesses as to why.
The Basics: How Deals Are Sourced
To start, let’s cover the primary methods by which small company acquisitions are most often initiated.
Every deal has a beginning. It usually arises based on someone’s proactive efforts to find a company with a willing seller. This process is referred to as deal sourcing, and it is an essential part of the deal-making process for private equity firms, search funds, and other investors in and buyers of small companies.
Within deal sourcing, there are two main types: brokered and proprietary.
Brokered deal sourcing involves working with a broker or intermediary to find potential investment opportunities. Brokers have a network of contacts in the investment community and can help investors identify deals that they might not be able to find on their own.
Proprietary deal sourcing involves identifying and acquiring potential investment opportunities without the help of a broker, banker, or other intermediary. This is done by identifying industries of interest, developing contact lists of business owners, and doing some form of cold outreach (email, call, etc.) or by networking or attending industry events. Much has already been written about each of these activities, and they don’t relate to the main topic of this article, so I’ll leave the reader to investigate these areas independently if they have further interest.
The Rise of Brokers
I don’t know what percentage of small deals involve an intermediary, but my sense is that the number is growing. Historically, the process of selling a business has been somewhat of a mystery with most buyers ignorant about even the most basic aspects of a transaction. Intermediaries have always served this market, but awareness of their services and the value they can provide was limited as few business owners had any occasion to meet or speak with a broker. As a result, most knowledge was picked up on the golf course, at an industry trade show, or from just pure hearsay and, in most cases, was highly anecdotal and likely inaccurate.
More recently, within the past 10-15 years, the growth of niche online vertical communities and websites has led to the proliferation of more freely accessible (and findable) information about the process of selling a company, comparable sale values, and the role of different service providers such as attorneys, accountants, and brokers.
Within the past 5-10 years, new technology tools that reduce the friction of mass outreach along with a growing number of potential buyers has led to a lot more contact points between sellers and those with information about the sale process.
Each email or phone call delivers a small amount of new information to a seller and makes them more informed about every aspect of how to maximize the value of the sale of their business. It also has the impact of making them less likely to respond to each future email or call since many owners get inundated with messages and many quickly lose interest in engaging at all.
Finally, having reached the point of saturation, and armed with more information about the value of intermediaries, I believe sellers are increasingly choosing to work with an advisor to assist them in what is likely a once-in-a-lifetime opportunity to secure their legacy and optimize their financial outcome. I believe this shift is systemic and will become more apparent in future years.
The Next Frontier: AI
In just the past six months, AI-powered tools have launched and been embraced by buyers and intermediaries. These tools can help to identify potential investment opportunities, personalize outreach at scale and for little cost, screen deals, and even aid in conducting due diligence.
As AI improves and it becomes even harder to tell who’s real and what’s just a bot, sellers will become even more cynical about a new email landing in their inbox. This, in turn, will quickly lead to a greater need for someone to vet and qualify buyers. A curator or a gatekeeper. Who is that person? For many, it will be a business broker. AI accelerates the shift to more intermediary-led deals and if the pace of new AI tools launching into practical use cases is representative, this migration will be fast.
The Future: What’s Old Will Become New Again
I’ve spent a lot of time thinking about what this means for firms like Majority Search. We’re very adept at proprietary sourcing and have a well-honed process for conducting our outreach. If the recipient of our efforts no longer trusts that we are a human, or we are the 50th message received from a buyer within the past week, our success rate will decline.
At first, I thought that content marketing would be the solution. If we developed a library of high quality content, it would serve as breadcrumbs for a seller looking into who we are and what we stand for as buyers. That probably still holds some truth to it, but with AI, it has now suddenly become much easier to rapidly create a body of work and publish it across many online platforms that could convincingly mimic the content produced by us or other firms sharing their ideas the old fashioned way.
Ultimately, the most reliable way I’ve thought for buyers like us to remain competitive in an increasingly competitive market may end up being in-person meetings and longer-term relationship building. Almost everything else can or will be able to be faked, including video conferences and phone calls as one recent article indicated. That would take things full circle with belly-to-belly interactions once again becoming the best tactic for connecting with sellers in the hopes of convincing them to entrust their legacy to you as a buyer.
Or, companies will end up just being run by AI CEOs (which is also already happening) and the need to ‘retire’ or sell becomes more voluntary.
In the meanwhile, we - and nearly every other buyer - will continue to reach out to owners of attractive companies as often as we can and keep our fingers crossed that our message will somehow make it past the spam filters and the even tougher human filters that sit on the other side of every screen and keyboard we use to ply our trade.
Majority Search is Hiring an Associate
Exciting news! We’re looking to expand our investment team by adding an Associate. This person will be the first non-founding member of the team and have an opportunity to help grow the firm and work on all aspects of our operations.
We’d also welcome your sharing this posting with any exceptional people in your network that might be a fit.
To learn more about the role or to apply, please click here.
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