NEWSLETTER, Vol. 1, No. 2, June 2007

Let’s Source a Deal: Part I
By Robert Befidi, Jr. and Mark R. Sinatra

The evolution of a deal is often unpredictable, but savvy buyers can improve their odds of success by taking steps to ensure optimal deal sourcing. This statement holds even truer for buyers in the lower-middle market where the sources for deal flow are fragmented based on geography, industry and size. For a buyer new to lower-middle market acquisitions, sourcing quality deal flow can be a time-consuming and daunting task.

So, how do you create high-quality deal flow on a consistent basis? A successful strategy involves both identifying the likely sources for deal flow and executing an efficient process for targeting these sources. At the highest level, deal flow can be segmented into two broad areas: mainstream and proprietary. There are various trade-offs associated with each area, which is why the optimal strategy for most buyers is to actively target both groups.

Part one of this two-part series on deal sourcing examines the deal flow created from mainstream sources and a process that buyers should implement when working with intermediaries.

Mainstream deals are defined as transactions which are actively represented by business intermediaries, such as brokers and investment banks. These intermediaries often represent the sellers and reach out to buyers, who specialize in the sectors, geographic markets, or deal size that they target. Although many intermediaries are focused on larger deals, a significant number of smaller firms are interested in doing business with buyers that invest in lower-middle market companies. The landscape of intermediaries in the lower-middle market is incredibly fragmented and includes: full-service, middle-market investment banks, boutique advisory groups, and business brokers, who typically work on smaller (<$5MM in EV) deals.

Buyers should be aware that the marketing process for business intermediaries has grown so efficient that most deals they represent are highly competitive, with the intensity of competition being further fueled by an increase in the amount of committed acquisition capital available for deals in the lower-middle market. Often, in these deals intermediaries will employ a full-blown auction or controlled auction, which may result in a higher than anticipated valuation for the target company. According to a study by Dinan and Company, auction deals may result in an increase of 1.5x – 2.5x EBITDA in the purchase price, versus proprietary (i.e. non-represented) deals. In addition, information flow is controlled by the intermediary, which in some cases may unintentionally limit the transparency of information critical to the buyer in analyzing the deal.

Despite these challenges, there are a few advantages worth noting. Buyers can greatly increase their overall deal flow by sourcing deals from intermediaries, due to their sheer number. Moreover, deals sponsored by intermediaries are often screened to ensure that the seller is truly motivated to sell. This consideration, if overlooked, often exposes buyers to the risk of engaging in time and resource consuming transactions where a seemingly motivated seller was truly only interested in testing the waters and getting a free valuation of their business. Lastly, the time to close a mainstream deal may be quicker than a proprietary deal, where more time will be spent upfront qualifying the seller and compiling the necessary financial information.

Identifying the right intermediaries is just one important step in creating mainstream deal flow. Experienced buyers are adept at employing an efficient process to source and evaluate sponsored deals. A framework used by Gordian Capital is the DCP Approach™ (Discipline, Credibility and Persistence).

In a seller’s market, a compelling, affordable deal is hard to find. Buyers can often get frustrated with the magnitude of valuations and competition and, thus may be tempted to stray from their true deal criteria focus (industry, size, geography, etc.). Clearly, this lack of discipline presents a risk for buyers, who will either close on a deal that they do not have a true competitive advantage in or pursue a transaction only to pull out later in the process. Buyers should have the discipline to consistently apply their criteria to investment opportunities and resist the temptation to make exceptions.

The past few years have seen an increasing number of financial buyers in the lower- middle market. This trend highlights the need for financial buyers to clearly articulate their differentiating factors when they converse with intermediaries. Simply saying that one is a $200 million fund based in New York will not create a material difference in the minds of intermediaries. It is important for buyers to speak about their expertise in a certain industry or geography, or highlight advantages that they provide to owners. For example, at Gordian Capital, we like to articulate our value proposition by stating that we are one of the most flexible liquidity solutions in the marketplace, both in terms of owner transition period and deal structure.

In addition to value proposition, intermediaries also want to ensure that buyers are truly motivated to acquire and can easily finance an acquisition. For committed funds, this does not pose a problem, but for fundless sponsors, pledge funds, and the likes, this is worth addressing directly with the intermediary.

Because of the increase in the number of buyers in today’s market, it is important for buyers to reach out to intermediaries on a regular basis, especially to inform them of portfolio acquisitions and other material updates. It is also critical for buyers to be thorough in contacting intermediaries. It is easy to wait for intermediaries to initiate a call, but this is risky, particularly for new funds.

By targeting the right intermediaries and implementing the DCP Approach™, buyers can significantly increase the quality and quantity of the deal flow they receive from mainstream sources. However, buyers should carefully weigh the pros and cons of this strategy, especially when compared to proprietary deal flow, which we will analyze in our next newsletter.

About Gordian Capital: Gordian Capital LLC (“Gordian”) is a private investment firm that seeks to acquire and actively operate a privately-held company with revenues of $5-$50 million located in the U.S. or Canada. Gordian is unique in that its managers will assume senior management responsibility of the acquired company; thereby offering an ideal exit opportunity for owners who seek to partially or fully remove themselves from day-to-day operations. Gordian’s primary objective is to continue the long-term growth of the acquired company, while ensuring that the owner’s legacy and employees’ welfare are maintained.

To learn more about Gordian, please visit

Please feel free to contact us to learn more about Gordian Capital, LLC or to discuss a specific investment opportunity. We pay industry-standard fees for referrals that lead to the closing of a transaction. All material is kept strictly confidential and returned upon request. We will review and provide feedback for all opportunities we receive in a timely manner; generally within one business week.

Robert Befidi, Jr.
Managing Director
Direct: (646) 620-1552

Mark R. Sinatra
Managing Director
Direct: (646) 620-2054

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