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Advisors, Private Equity

Outbound vs. Inbound Deal Flow

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When I talk with corporate finance and LBO / private equity professionals about how they source deals and generate deal flow to fill their deal pipelines, most reel off a laundry list that includes: personal relationships, trade shows, email blasts, cold calling, “intermediary road shows”, outsourced telemarketing (through buyside bankers), and other offline marketing.  At Axial, we call these methods “outbound deal origination” where a firm pushes its message out far and wide with different audiences to help them find the “needles in the haystack”.

We think outbound marketing techniques are getting less and less effective over time for two reasons. First, business owners today running sizable private companies (over 15M of revenues and a couple million dollars of EBIT or adjusted EBITDA) are regularly contacted by private equity and strategic buyers. Second, the difficulty and cost for business owners to learn more about different buyers, capital sources, etc. through search engines, social networks like LinkedIn, online M&A marketplaces like Axial, and niche community sites is much lower now than going to an in-person seminar or flying to a conference halfway across the country. S/he can learn about different strategic buyers or private investment firms online through your website, through free buyer directories, Google, etc.

Rather than exclusively do outbound deal origination to the hundreds of thousands (maybe millions?) of private companies in the middle market and lower middle market, we advocate doing a mix of “inbound deal origination” where you help your firm “get found” by intermediaries, business advisors and business owners already active in your industries of focus and areas of expertise.

In order to do this, you need to associate your company with various online ‘watering holes’ for your industry that attract the appropriate visitors naturally through word of mouth, search engines, online marketplaces and blogs where business owners and intermediaries are congregating, corresponding and, eventually, transacting.

I believe most deal origination, corporate finance and private equity professionals today spend 90% of their efforts and resources on outbound deal origination and a maximum of 10% on inbound deal origination; I advocate that those ratios even out.

The best analogy I can come up with is that traditional deal professionals looking to garner interest from private business owners are like lions hunting in the jungle for elephants.  The elephants used to be plentiful in the jungle in the ’80s and ’90s when the lions learned their trade, but there are less and less in the jungle each year. They have mostly migrated to various watering holes on the savannah (the internet) and the lions population has grown a lot in the last 20 years (the rise of private equity, more sophisticated financial engineering, credit availability for LBOs and debt-financed strategic acquisitions, globalization and the rise of international buyers).

So, rather than continuing to exclusively hunt in the jungle, we recommend setting up shop at the various online watering holes and even building your own specialized watering hole that’s especially focused on attracting the right animals to your destination.

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