If you have started to look at individual acquisition prospects, you may be wondering, why use a prospect funnel? That’s to say, why pursue lots of possible acquisitions, rather than focus on just one?
I have frequently been approached by clients after a deal suddenly fell through—a deal they had been working on for months or even years. I recall a manufacturer of agricultural equipment that was convinced from the start that they had found the ‘‘Holy Grail’’ of acquisition targets. They believed this prospect was the perfect fit for their external growth needs. They cast aside all other candidates and poured all their energy into the pursuit of this one company.
After months of positive negotiations, the prospect abruptly got cold feet and backed out. The owner decided he wasn’t ready to sell a business that had been in family hands for multiple generations. The agricultural equipment manufacturer was left to start the entire acquisition process over.
The lesson is clear: Have one reason for making an acquisition, but have many viable prospects. Don’t just have a Plan B. Have a Plan C, a Plan D, and so on. Create a funnel and fill it with likely prospects. This approach yields many benefits.
The concept of the Prospect Funnel is that you begin by considering a broad sweep of companies. It could be dozens or even hundreds. Gradually, you filter this list through your prospect criteria, eliminating weaker candidates step-by-step.
At each stage, as you move down the funnel, your research becomes more detailed and your analysis more exacting. Finally, you identify a handful worth engaging personally, and from these you select the company or companies with whom you initiate negotiations for a purchase.
The Prospect Funnel is an insurance policy: Your acquisition process can continue unhindered if there is a breakdown with a favored prospect. There are other benefits, though. Having several well-researched prospects gives you a sound basis for comparison as you gather more and more information on your priority targets. Finally, the funnel approach enables you to tee up for the next acquisition the moment the first purchase is complete, and in rare circumstances, it allows you to consider buying multiple companies at the same time.
*This post was adapted from David Braun’s Successful Acquisition, available at Amazon.com