Optimizing Acquisition Strategies: Navigating the Corporate Development Funnel for Companies with $3M – $15M EBITDA

Written By: Gerald O’Dwyer the PE Guru

1. Size of the Funnel 

Given the specificity of the EBITDA range, the nature of the market, and the competitiveness in acquiring such companies, you should aim for a broad funnel initially. Historically, in the M&A world, acquisition strategies targeting this range might consider: 

• Initial Prospective List: 150 – 250 companies
• Shortlisted Companies (after initial analysis): 20 – 40
• In-depth Due Diligence: 5 – 10 companies
• Final Acquisition: 1 – 3 companies

2. Stages of the Funnel

• Discovery (150-250 companies): At this stage, you’ll gather a list of potential targets based on criteria such as industry, growth rate, geographic location, etc.
• Initial Analysis (20-40 companies): Basic financial screening, ensuring that companies fit the EBITDA range, and assessing fit with your new venture’s strategic objectives.
• Engagement & Expression of Interest (EOI) (10-15 companies): This involves initiating contact, expressing potential interest in an acquisition, and potentially getting initial data rooms for review.
• Due Diligence (5-10 companies): In-depth analysis of shortlisted companies, including financial, operational, legal, and strategic evaluations.
• Negotiation & LOI (Letter of Intent) (3-5 companies): Formalizing interest and moving towards a purchase agreement.
• Final Acquisition (1-3 companies): Closing the deal with selected companies.

3. Ways to Find Companies to Buy

• Brokers/Intermediaries: Many businesses are listed through brokers who help owners sell their businesses.
• Industry Contacts: Building relationships with industry insiders can provide leads.
• Networking Events & Conferences: Great for meeting potential sellers or getting references.
• Direct Outreach: Researching and approaching potential companies directly.
• Online Marketplaces: Websites like BizBuySell or Axial can have listings for businesses.
• Private Equity and VC Firms: They often have portfolio companies that they’re looking to divest.
• Hire a Research Team: A dedicated team can use tools like PitchBook, CapIQ, etc., to generate a list of prospective companies.

4. Road Map

1. Market Analysis: Understand the landscape, major players, and trends in your target industry.
2. Define Criteria: Set specific criteria that an acquisition target must meet.
3. Prospecting & Discovery: Use multiple channels to find companies.
4. Initial Outreach & EOI: Engage with prospective companies.
5. Due Diligence: Perform in-depth evaluations.
6. Negotiations: Discuss the terms, value, and structure of the deal.
7. Close the Deal: Sign the agreements, transfer assets, and integrate.

5. Timing for the Process

• Discovery & Initial Analysis: 1-3 months
• Engagement & EOI: 1-2 months
• Due Diligence: 2-6 months
• Negotiation & LOI: 1-3 months
• Final Acquisition: 1-2 months

The total estimated time can range from 6 months to over a year, depending on the complexity of the deals and the responsiveness of the sellers. 

6. What to Expect

• Challenges in Finding the Right Fit: Not every company will align with your strategic vision.
• Negotiation Hurdles: Price, terms, and post-acquisition roles can be sticking points.
• Due Diligence Surprises: Unforeseen liabilities or operational issues may arise.
• Cultural Integration: Post-acquisition, integrating cultures and operations can be challenging.

Remember, every acquisition journey is unique. While these are broad guidelines, specific industries or market conditions can vary these timelines and processes. Regularly consult with experts and adapt your strategy based on feedback and new information.