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Deal sourcing is fundamental to mergers and acquisitions (M&A) activity and represents the first stage of any transaction. It involves identifying possible investment opportunities, favorably positioning your firm to prospective buyers and sellers, generating leads, and managing relationships with potential intermediaries.
While M&A activity over the past year in America and Europe has been on a decline, 70% of investment bankers believe the M&A market will be more active in 2024 and beyond. As more and more startups look to exit through M&A deals, it’s understandable why the market is set to improve. In fact, the majority of successful startup exits aren’t IPOs as some assume—instead, they’re acquisitions.
As there is a growing urgency to adopt AI, address ESG-related objectives, and drive strategic growth, more and more companies are pursuing M&A.
In this guide to M&A deal sourcing, you’ll learn the steps of the M&A deal origination process and discover the deal sourcing strategies that deal teams use to identify potential targets and build relationships with buyers and sellers. You’ll also learn how leading teams are using deal sourcing software and other new technologies to accelerate their M&A deal flow pipeline.
What is deal origination?
Deal origination involves sourcing investment opportunities by private equity (PE) firms, venture capital firms, and investment banks. It is the first step in creating a deal and involves identifying startups and companies to pitch to potential buyers. It also involves a lot of relationship-building, lead generation, and pitching.
By sourcing deals, finance professionals use connections and research tools to gain knowledge of capital market deals. They can then make competitive bids or create deals through intermediary relationships.
Keeping a sales pipeline full through consistent deal origination is one of the most challenging parts of working as a finance professional. As new deal sourcing technologies come to market, more and more dealmakers are finding new ways to support their search for the next big close.
The mergers and acquisitions deal origination process
Private equity firms, investment banks, venture capitalists, and other finance professionals all rely on the sourcing process to find investment opportunities with the potential for value creation. However, the M&A deal origination process is unique in some ways.
During deal origination, your goal is to identify acquisition targets based on clearly defined criteria, such as strategic fit, competition, and financial performance.
The M&A deal origination process happens in one of two ways:
- Outbound: You contact parties in the market who are looking to close transactions, such as business owners and technology companies.
- Inbound: Parties in the market contact you about their willingness and availability to close transactions.
The smaller your company or firm is, the more likely you will need to be proactive in sourcing your own proprietary deals. Good deals—whether sell-side opportunities or buy-side deals—generally won’t arrive on your doorstep unsolicited.
What is deal sourcing?
Deal sourcing is a method that allows financial services groups like investment bankers, venture capital firms, and private equity firms to discover, evaluate, and choose investment opportunities. Deal sourcing is integral to ensure firms build a diversified investment portfolio and provide a wide range of advisory services.
Part of deal sourcing is finding high-potential companies, and startups. Investors tap into their industry relationships and networks and refine their prospects through due diligence and qualification steps. This allows firms to pinpoint deals that have synergies with their investment strategy and risk appetite.
The best practices for M&A deal sourcing
There are many approaches to deal sourcing. Some companies use dedicated in-house teams to handle deal origination, while others engage with investment banks or other advisors. However, having a wide network of contacts is crucial regardless of your approach.
During deal sourcing, acquiring companies and investors seek to tap into the widest possible pool of potential target companies so they can find the best possible deals.
Build and refine your database
Building a database of potential investment opportunities is critical. Pick a target industry, and start collecting contacts within that target industry by conducting outreach via social media, online research, attending industry events, and networking.
You may also consider purchasing a list from an industry association or a third-party database like CB Insights, Pitchbook, Factset, or S&P Market Intelligence. Leading M&A software platforms automatically enrich your existing datasets with external data partner information so you can build your database even faster.
Refine your initial list. Categorize your potential opportunities into “A” and “C” deals to protect you from getting too aggressive or missing out on deals. Consider what types of deals you’re looking for to categorize acquisition targets. What deal size is right for your firm?
What is the valuation of each company you’re evaluating? Are your targets realistic or unrealistic? Is the geography of a particular company a factor in your decision-making? Are there any concerns with the regulatory approval process? Is your niche too narrow or too broad?
Deals on your “A” list should be strong M&A targets that are ideal in size and are a strategic fit. Ideally, you want to end up with about 25 targets on your top strategic targets list.
Monitor the news and other trigger events daily so you can continue adding to and refining your list over time.
Keep your website updated
When startups and middle-market companies are looking to sell their businesses, they often start their search online by seeking out investment banks and other investors in their region or specialty. A clear, professional website optimized for search engines will ensure that your firm shows up in front of prospects who are searching for possible investors.
Maintain a clear, professional website that highlights your team’s capabilities. Keep the site updated with regular content—including videos, podcast episodes, or blog posts—that your potential M&A targets will find useful. Continue to tell your business’s story and build a strong brand that companies can trust.
Keep your network engaged
All M&A deal origination involves long-term networking, and building a robust network is the key to maintaining quality deal flow. Often, investment bankers act as intermediaries in deals by bringing two sides together—including parties that are completely unknown to each other. The more time you can spend on relationship building, and the better your reputation is, the more consistent your deal sourcing will be.
These deals can happen quickly but the relationships that lead to these deals are built over longer periods of time. You want to keep these relationships strong so you can take advantage of these opportunities and be top of mind when an inbound opportunity arises or you see an event in the news.
Build relationships with strategic investment opportunities and stakeholders by following up smartly and consistently. Use a variety of messages, including phone calls, LinkedIn messaging, and email communication, to develop quality relationships with potential acquisitions and investors.
Spot opportunities when companies change strategy
Changes in strategy or technology platforms within companies can also lead to acquisition opportunities for investment banks. For example, a company might be about to spin off a larger business unit. That spin-off company might not be meeting the objectives of its original parent company, but it could still be attractive to other acquirers like private equity and venture capital firms.
Use an M&A deal origination platform
The world’s most successful M&A dealmakers use deal sourcing platforms as part of their deal origination process to build long-lasting, engaged relationships with target companies and others in their network of contacts.
M&A deals are complex and long-term, on the buy-side and the sell-side, and it’s easy to lose track of key relationships across the many deals you’re managing. Use a modern CRM to keep tabs on all the players in your M&A investment opportunities and stay in touch consistently.
How leading M&A professionals consistently source deals
If your firm still uses Excel spreadsheets to manage M&A deal sourcing and track workflows, it might be time to consider a better solution.
Affinity’s M&A software platform eliminates manual data entry by automatically capturing information from emails, calendars, and public sources. This dramatically reduces the risk of errors and saves your entire deal team hundreds of hours per year so you can focus on building relationships and filling your pipelines with quality deals.
Affinity’s relationship intelligence algorithm can help your team source high-quality M&A deals by:
- Capturing a complete historical view of communication and activity, showing your team’s interactions with a contact or a company, and ensuring consolidation of the information.
- Instantly calculating relationship strength with Affinity’s patented relationship scoring.
- Creating custom lists of relevant connections by location, industry, and investment stage.
- Setting smart triggers and reminders so important contacts or deals don’t fall through the cracks.
Talk to us today to learn how relationship intelligence can help your firm source more M&A deals and stay ahead of the competition.
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M&A deals FAQs
What are M&A deals?
M&A transactions are business deals in which two businesses are combined through a binding agreement that outlines the rights and responsibilities of each party involved. Normally, M&A deals help create an economy of scale, where both companies can lower their fixed costs by eliminating duplicate departments and resources.
What is the difference between mergers and acquisitions?
In a merger, the boards of directors for two companies approve the combination and seek shareholders’ approval. A deal can also be considered a merger when both companies’ CEOs agree it’s in their best interest to join. In a straightforward acquisition, the acquiring company gains the majority in the acquired firm, which remains the same after the acquisition.
Is it better to IPO or get acquired?
There are pros and cons to IPOs and acquisitions. With an acquisition, the company gains a larger market share and access to new technology. However, the company may not get what it wants in the deal. With an IPO, the company can get more people invested in it and raise more money, but if it isn’t successful, people may lose their money.
What is a buyout?
A buyout is an acquisition deal where the acquiring company gains a controlling interest in the company.
What are the sourcing channels for M&A?
Some of the most common deal sourcing channels include engaging investment banks or other advisors dedicated to deal sourcing or using an in-house team dedicated to deal origination. Deal sourcing relies on having an extensive network of strong relationships and a strong reputation in the industry to help source a wide range of deal structures, including traditional M&As, partnerships, and alliances.
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