Intermediated deal sourcing, often referred to as brokered sourcing, involves leveraging professional intermediaries—such as business brokers, M&A advisors, attorneys, and other advisors—to identify potential investment opportunities. While this approach differs significantly from proprietary deal sourcing, it offers its own set of advantages and challenges. Here’s an overview of how intermediated deal sourcing works and why it remains a popular strategy for private equity firms:
Key Aspects of Intermediated Deal Sourcing
1 - Auction-Style Process
One of the defining characteristics of intermediated deal sourcing is that deals are often presented through an auction-style process. In these scenarios, intermediaries gather multiple potential buyers, each vying for the same investment opportunity. While this competitive process can drive up valuations, it also adds a layer of transparency, as the deals are well-documented and marketed. The auction format ensures that buyers are competing on relatively equal terms, making it easier for private equity firms to assess and compare opportunities based on a standard set of information.
2 - Higher Likelihood of Closing Deals
Since intermediaries typically work with businesses that are actively looking to sell, the likelihood of closing deals is generally higher in intermediated sourcing compared to proprietary sourcing. Sellers involved in brokered transactions are often more prepared and motivated to sell, with clear objectives and timelines. This readiness on the part of the seller reduces the risk of deal fall-throughs, providing greater certainty and efficiency for private equity firms.
3 - Access to a Broader Range of Opportunities
Intermediated deal sourcing offers private equity firms access to a wider variety of opportunities across different sectors, industries, and geographies. Professional intermediaries often have extensive networks and expertise, enabling them to present a broad spectrum of investment opportunities that may not be visible through proprietary channels. For firms looking to cast a wider net or explore new industries, intermediated sourcing can significantly expand their deal pipeline.
Challenges of Intermediated Sourcing
While intermediated deal sourcing offers certain benefits, such as access to a wide array of opportunities and a higher likelihood of closing deals, it also comes with significant challenges. The nature of brokered transactions and auction-style processes can introduce complications that private equity firms must navigate carefully. Here are some of the key challenges associated with intermediated sourcing:
1. Deals Often Trade at a Premium
One of the biggest drawbacks of intermediated deal sourcing is the pricing. Since these deals are typically marketed widely to multiple potential buyers, competition drives up valuations, causing deals to trade at a premium compared to off-market opportunities. In an auction-style process, buyers often face pressure to offer higher bids in order to win the deal. This inflated pricing can squeeze margins and reduce the potential for value creation, especially if the firm ends up overpaying to outbid competitors.
2. More Competitive, Leading to Bidding Wars
Intermediated deals often involve a competitive bidding process, where multiple private equity firms and strategic buyers vie for the same target. This environment can quickly escalate into bidding wars, driving up the final purchase price and making it more challenging for firms to secure deals at favorable terms. Additionally, the need to move quickly in these competitive situations may limit the time available for thorough due diligence, increasing the risk of overlooking important aspects of the transaction.
3. Less Opportunity for Relationship-Building with Sellers
In intermediated sourcing, there is often less opportunity to build meaningful relationships with the sellers compared to proprietary deals. Since intermediaries control much of the process and communication, interactions between the buyer and seller may be limited or more formal. This lack of personal connection can make it harder for private equity firms to align interests with the seller, potentially leading to a less collaborative transaction process. Without the opportunity to develop a deeper relationship, firms may miss out on insights that could help in post-acquisition transitions or value-creation strategies.
Conclusion
Intermediated deal sourcing offers private equity firms significant advantages, such as access to a wider range of opportunities and an increased likelihood of closing deals, while also introducing challenges like higher valuations due to competition and less opportunity for relationship-building with sellers. The structured and transparent nature of the auction-style process provides predictability that many firms value, though it often comes with competitive pressures and inflated prices. Platforms like DealMQL play a crucial role in the deal sourcing process, allowing them to stay competitive in the evolving deal sourcing landscape while maintaining strategic control over their efforts.
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