How many companies do you need to look at to do a deal? This is a common question we get from clients. Experience tells us you need to look at about 100 companies in order to execute one deal. That doesn’t mean you go through formal due diligence with 100 companies, but you do need to identify and do at least basic level research on them.
The Prospect Funnel
We look at this process of researching and selecting acquisition prospects like a funnel that narrows from 100 companies at the top to one deal at the bottom. In the beginning, you do basic research on 100 companies and measure them against your acquisition criteria. At this stage about half of the options are eliminated, so we’re left with 50 companies to do in-depth research on. Again you measure your findings against your criteria and about 25 companies pass the test. You call up the owners of these 25 companies, and about half of them will meet with you. Then you get maybe six second meetings, and you can agree to terms with at least one, maybe a couple, and out of that you negotiate a deal.
Have Many Options
Many are shocked when they hear about our approach because it seems like a lot of companies to get to one deal. People will say it takes too much time or resources to research all of the companies. However, as I noted above, you don’t need to do in-depth research and meet with the owners of 100 companies. At each stage of the process as you proceed down the funnel more and more companies get eliminated either because you find they don’t meet your criteria or because the owner doesn’t take your phone call or meeting.
Taking a broad approach at the beginning ensures you take the time to evaluate the marketplace and all of your options and that you have many options for acquisition. We do not recommend only considering one company for acquisition at a time because the deal could fall apart for a number of reasons. The owner could get cold feet or you could discover something during due diligence, and then you’ll have to start the acquisition search all over again.
Another common objection we hear is that there are not that many companies for sale in the marketplace, I want to make sure you understand that we’re talking about looking at not-for-sale companies as well as for-sale deals.
We have lots of experience in not-for-sale acquisitions and when we work for a strategic buyer, we’re approaching companies whether they have a for-sale sign in front of their business or not. If it’s the right strategic fit, we’ll call them up and talk to the owner about selling their company or bringing in another company to own all or part of it.