Top M&A Deal Sourcing Strategies

Finding the perfect deal sourcing strategy is the missing puzzle piece for many investment bankers, venture capitalists, private equity firms, and corporate development teams. Deal sourcing, sometimes known as deal origination, is used to find and target prime investment opportunities.

But just as every organization is unique, there are many different strategies available to source the right deals, ensure high conversion rates, and deliver a large ROI. It's easy to rely on legacy tactics — conferences, in-person meetings, phone calls, etc. — especially for firms that have been around for decades.

However, as new competitors and technologies emerge daily, it's important to examine your organization’s deal sourcing strategies and how they can be improved. Recent advances in technology, such as artificial intelligence (AI), are quickly improving all aspects of dealmaking, including origination.

In this article, we’ll go over commonly used M&A deal sourcing strategies, their pros and cons, and how technology can help you more efficiently and effectively build a solid M&A pipeline.

Types of M&A Deal Sourcing Strategies

Before we dive into strategies, it's first important to understand that your organization needs to source many more investment opportunities than the actual number of deals you wish to close. This is because leads' conversion rates from stage to stage will almost never be 100% — meaning, as opportunities move through the M&A pipeline, fewer "make the cut" at each stage.

As the above graphic shows, you could potentially identify 1,000 investment opportunities but only have 10 completed deals by the end of that year. Luckily, there are many different strategies that your firm can use to source these leads and maximize the percentage that make it all the way through this funnel.

M&A Inbound Sourcing Strategies

Inbound deal sourcing includes all transactions that come into your firm through its various connections and networks. These include channels such as direct referrals from lawyers or consultants, portfolio member recommendations, and even cold emails from founders.

Investment banks are the most common source of inbound deals. These intermediaries facilitate deals on the sell-side and the buy-side by representing companies looking to be acquired as well as firms looking to invest.

Pros:

• Inbound deal sourcing saves time and resources in the initial phases of the deal origination process simply because deals are coming to you and you don't have to source them.
• Leads may be pre-qualified and are often warmer than those generated through other deal sourcing methods.
• The latest deal origination software can streamline the deal sourcing process of learning about and qualifying previously unknown inbound opportunities — a process that used to take weeks of manual, time-consuming research.

Cons:

• You have less control over the quantity or quality of leads that come in.
• Relying solely on inbound deal sourcing makes it difficult to create accurate forecasts and goals since lead quantity and quality are unpredictable.
• It’s extremely competitive, since companies and sell-side investment banks that are actively seeking investment are likely to reach out to multiple firms at once.
• Inbound deal sourcing largely relies on the size of your firm’s network, which may be a challenge for smaller firms, those that are just starting out, or those with particularly niche interests.

M&A Outbound Sourcing Strategies

While inbound sourcing is essentially waiting for a deal to come to you, outbound deal sourcing means proactively uncovering and connecting with potential opportunities. This type of deal origination strategy involves creating a list of potential, promising leads and then reaching out to them directly. Most firms will have a dedicated business development team for this approach.

Pros:

• You control the quantity and quality of companies you reach out to, which creates a more consistent and measurable deal flow.
• Outbound deal sourcing offers compelling opportunities to identify promising companies earlier in their lifecycles, often far before the competition, and help develop a strong proprietary deal flow.
• Teams can focus on finding opportunities that directly align with their or their clients’ objectives and investment theses, increasing overall conversion rates.
• Deal sourcing platforms make discovering and researching leads significantly more efficient, as AI-powered list building takes a fraction of the time it would manually.
• Technology-enabled firms can more easily scale and regularly engage with more leads through automated programs such as email nurture campaigns, AI chatbots, and more to keep them top-of-mind.

Cons:

• Finding reliable information about private companies is extremely difficult and time-consuming without the help of the latest M&A deal sourcing platforms.
• Outbound deal sourcing for private equity often takes a backseat when there is an influx of warm inbound leads.
• It requires your organization to expand its sourcing skill sets, possibly hire new team members, and build on the traditional inbound approach.

Relationship-Driven M&A Sourcing Strategies

Relationship-driven deal sourcing refers to using your direct and extended network of contacts to discover opportunities, whether they are inbound or outbound. The key for it to be considered relationship-driven M&A deal sourcing is only dependent upon it stemming from a known network connection.

Pros:

• As Best of Bootstrapped founder, Joe Brown of DearDoc, says, owners and operators are more likely to take a meeting with you if you share a mutual connection, no matter how minor or obscure.
• A shared network may surface information that can help you create more personalized interactions with opportunities, giving you a competitive edge.
• Relationship-driven deals often move faster than other deal types because introductions are warm and made when companies are actively seeking investment or acquisition.

Cons:

• Just like inbound deal sourcing for private equity, relationship-driven deal sourcing is also opportunistic and unpredictable, making it difficult to build up a consistent deal flow.
• Just because you share a connection with a founder or executive doesn’t mean their business is the right fit for your investment theme or requirements.
• Opportunities received via inbound, relationship-driven deal sourcing are likely to be highly competitive since these companies or their sell-side representatives probably reached out to multiple connections at once in their search for funding.

Data-Driven M&A Sourcing Strategies

Data-driven deal sourcing uses data to pinpoint relevant investment opportunities prior to reaching out to or moving forward with them. It's typically used in outbound efforts, and is most effective when used in conjunction with relationship-driven and in-person deal sourcing strategies. However, it can be used to supercharge any of the approaches discussed in this blog.

For instance, imagine you got a new inbound lead from a known contact. You may be inclined to chase the lead simply because, on the surface, it already has two major things going for it: It came to you and you know who referred it. But with data, you could uncover the lead has recently lost a third of its workforce and its revenue is down 20% year-over-year. Armed with data, your organization can make more informed decisions in all your deal sourcing efforts.

Pros:

• Data-driven deal sourcing includes collecting the information necessary to deliver tailored outreach and pitches for each individual account, helping your org stand out from the competition.
• Pre-qualifying leads through research saves time by preventing you from putting effort into leads that don’t align with your investment thesis or sector focus. It also ensures higher conversion and success rates by weeding out less suitable opportunities.
• Data-driven deal sourcing makes it possible to discover existing network connections and relationships at highly relevant companies. For example, you may learn that a connection of yours is a decision-maker at a target company, making it easy to view people you have in common on social platforms such as LinkedIn to secure a warm introduction.
• As you collect more data, you can create custom, automated lead scoring models and other proprietary assets and market insights. These help your org move faster and with greater expertise and precision compared to your competitors.
• Armed with all the data you've learned throughout the deal process, you can streamline the rest of the M&A process and are likely to uncover fewer surprises in the future, especially during stages such as due diligence.

Cons:

• Without the latest and greatest technology and tools, you may spend hours manually researching companies, especially when it comes to collecting private company data for smaller or founder-owned businesses, which represent a large portion of add-on acquisitions.
• Not all data sources are created equal — beware of tools that over-promise artificial intelligence capabilities without human oversight, as these tools are often plagued by data quality issues.
• With great data comes great responsibility — data-driven sourcing is most effective when organizations have a CRM in place to track and organize all the data they collect.

In-Person Deal Sourcing Strategies

In-person deal sourcing is any lead your organization generates by approaching and talking with a potential investment opportunity face-to-face. Attending industry conferences and tradeshows is the number one method for in-person deal sourcing.

Pros:

• Of all the M&A deal sourcing strategies on this list, in-person deal sourcing typically makes the most memorable and lasting first impression with opportunities since face-to-face interactions build trust and familiarity more quickly than digital engagements.
• In-person sourcing is highly effective when used in conjunction with data-driven deal sourcing. For example, you could adopt a hybrid conference strategy and use a tool like Sourcescrub to identify which trade show attendees most closely align with your investment thesis. You can then brush up on these companies’ latest news and accomplishments and seek them out in the expo hall armed with these insights.

Cons:

• Conference networking is highly unpredictable, and making the right connection without any prior planning or research is a game of chance.
• In-person deal sourcing is nearly impossible to scale without adding significant headcount.
• It’s time-consuming and expensive, often requiring travel, event tickets, and related costs.
• The COVID-19 pandemic showed us that orgs can’t rely solely on in-person deal sourcing tactics, and should always have technologies like Zoom in place.

Online Deal Sourcing Strategies

Online deal sourcing is done — you guessed it — online. Firms are increasingly relying on online deal sourcing as technology continues to develop and digital transformation takes hold.

Pros:

• Online deal sourcing for private equity and M&A offers firms autonomy and empowers them to seek highly qualified opportunities that align with their own goals.
• Conducting research online is more cost-effective than in person, and it cuts overhead costs such as paying specialized sources for the deal origination process.
• Online deal sourcing can be used to effectively research individuals ahead of in-person meetings and events, making it a valuable strategy on its own or in combination with any of the others on this list.
• The right tools can make this strategy highly scalable without sacrificing lead quality.

Cons:

• Researching deals online can be tedious and time-consuming if you do not utilize the latest and greatest deal sourcing platform.
• Founders and operators receive a lot of online investment inquiries, which makes it more difficult to stand out. Data-driven sourcing strategies can help to personalize outreach, though there is still an initial barrier to online strategies that in-person methods don't have.
• The number of touches it takes to successfully connect with a lead is often much higher and can be reliant on immediacy and timing. Your firm may need to send a dozen messages or calls before first contact ever occurs.
• Online deal sourcing without the help of quality data service providers that are integrated with your entire tech stack can lead to your team using inconsistent or outdated information.

Using Technology to Amplify Your Firm's Deal Sourcing Strategies

With the plethora of deal sourcing strategies available, it's often tough to determine which would be most beneficial for your firm. Recent technology advancements such as AI can offer many benefits throughout the M&A process for firms looking to amp up their deal sourcing strategies.

Let's dive into how tech and AI can take your firm's M&A deal sourcing to the next level.

Market Mapping & Research

Before your organization can identify which opportunities to pursue, it's important to first understand the markets in which you want to play. This includes identifying competitor firms as well as notable companies and their competitors in the space.

Market mapping used to take weeks of manually documenting company information from various sites or collecting data from conversations with executives. However, technology and data solutions have made the research stage of the deal sourcing process far more efficient.

Technology — especially artificial intelligence (AI) — is fantastic at compiling information from thousands of sources and helping you identify trends. This information can then be used to create comprehensive market maps and quickly identify the key criteria to build investment theses and pinpoint the best opportunities for your firm.

However, it's important to also understand that not all AI deal sourcing solutions are created equal. Many will tout the amount of information they surface, but only the ones that provide sources-first data should be considered. By tying each piece of information to its original source, sources-first data helps you more easily map entire markets — including notable companies, categories, and competitors — via an interconnected web of insight versus disassociated, context-less data points.

List Building

With your target markets mapped and investments theses in hand, it's time to build potential contact lists. Just as with market mapping, technology has made this step of the deal sourcing process far more streamlined, taking drastically less time than in previous years.

Using your investment theses, M&A deal sourcing platforms can use your ideal company criteria as filters and automatically discover opportunities that match. For instance, if your firm wants to target mid-market, bootstrapped financial technology (FinTech) companies in the US with fewer than 1,000 employees, technology can quickly search and deliver full lists with key points of contact in mere minutes.

Plus, any time a new company is found that matches your criteria, the platform can alert your team for quick contact. With technology, firms are able to source, contact, and keep apprised of any updates much more easily and quickly, making the entire M&A process much more efficient.

Some solutions even provide growth signals on companies in your lists. These key points of data indicate certain criteria — e.g., financial health, revenue growth, employee growth — that help your organization generate more relevant lists and identify top companies from the very start of the M&A process.

Shortlisting and Vetting Opportunities

After building lists of potential opportunities, it's time to vet them and create shortlists. While having highly targeted lists helps to reduce the shortlisting process, it's still important to actively chase only the hottest leads.

One method to filter your lead lists is through lead scoring. Depending on each opportunity's initial criteria and engagement with your firm, you assign points that add up to a lead score. This effectively grades each of your leads, either by adding or subtracting points (e.g., +5 points for visiting your website, -10 points for the account only having a Director-level contact).

More advanced CRMs often utilize AI deal sourcing methods such as predictive lead scoring models to make lead management processes more efficient. Predictive lead scoring takes past buying behavior, creates "ideal" opportunity profiles, and judges your lead list against those profiles, which can help surface higher-value opportunities.

By using technology to its fullest potential, your team can make more accurate shortlists, prioritize who to contact first, and, ultimately, spend more time on the most valuable prospects.

Lead Outreach, Engagement, and Nurture

As we detailed above, there are countless strategies for sourcing and making first contact with potential investment opportunities, and each tactic will have varying effectiveness, depending on each company's or contact's preference and your team's skill sets.

While technology is adding options to this list, for many firms, the "old stand-bys" are still incredibly prevalent. The key to success is to use relatively newer channels such as email and social media outreach and technology to augment every lead engagement method.

From hybrid conference strategies to using generative AI to create personalized emails at scale, technology and AI deal sourcing methods can help your team be far more efficient and productive. In fact, as AI continues to evolve, it can take on some of the more tedious tasks such as call transcript summarization or even suggesting the next steps to take on an opportunity. Some AI-powered platforms even offer company tracking and real-time alerts to help your team reach out at the most timely and relevant moments.

While actively chasing hot leads is important, and it's incredibly tempting to write off colder opportunities, software can help nurture all your leads — even those on the back burner. Marketing automation platforms (MAPs), bolstered by the rest of your tech stack, can help keep you top-of-mind for not-quite-ready opportunities, ensuring your firm is the first to know when a deal is ready to be struck.

Using Data Throughout the M&A Process

All the data you collect about each investment opportunity can be used in the later stages of the deal. Notoriously difficult stages such as due diligence can be made far easier to undertake if all the data you would need in this stage has already been collected previously in the M&A deal sourcing process.

However, one of the most beneficial parts of data and technology is analytics. Dealmakers often have stories about when a specific tactic was particularly effective or one of their more inspired strategies closed a deal. But the fact remains that anecdotal evidence is not the most reliable.

As your team finds new opportunities and moves them through the M&A pipeline, it's important to gather data to empirically determine what was most successful. For instance, you may find that executives at tech companies convert 20% more if they were first emailed versus cold-called. Inversely, you may find that calling VPs in manufacturing was more successful than emailing them. The key is to collect and analyze data to regularly evaluate and refine your tactics over time.

Supercharge Your M&A Deal Sourcing Strategy with the Right Tools

Success in dealmaking is largely dependent upon your organization’s ability to execute an effective combination of strategies that uniquely fit your objectives and capabilities. But no matter which deal sourcing strategies you choose, you’ll need the latest and greatest technology to effectively execute them.

Whether you’re directly sourcing highly qualified leads, connecting the right buy- and sell-side clients, or researching a potential connection before an industry event, Sourcescrub makes it possible for you to create and run a viable deal flow.

Evaluating a deal sourcing platform? Here are the six questions you need to ask to make the right choice.

Originally posted on “March 27, 2023”