In 2010, Inc’s John Warrilow reported on the fact that private equity giant Riverside Company closed only 15 of the 4,228 acquisitions it considered in 2009. Around the same time, Harvard Business Review reported that over 50% of deals don’t close, or fall short of expectations.
Undoubtedly, a lot has changed in the world of the private capital markets since then. Between the steady resurgence and growth of the U.S. economy we’ve witnessed of late and the more favorable tax circumstances for privately-held companies, dealmakers should feel like the days of low close rates are in the past. But do they?
In the increasingly competitive deal landscape of today, the last thing private equity professionals want to do is chase deals down rabbit holes and come up with nothing. But given all of the room for error that still exists in any merger or acquisition process, there will certainly always be a percentage of deals that fall apart.
Instead of accepting defeat, we’ve compiled our four best recommendations for private equity deal sourcing strategies using data and learnings from our clients over the past decade.
Track who was involved
Seasoned intermediaries keep deal negotiation fair and honest, and keep emotion from getting out of hand. If a certain intermediary keeps the deal on the tracks for a long time, that should certainly be noted. Conversely, if an intermediary brings an incredible deal to your firm’s doorstep, but then can’t execute an IOI, that should also be considered when making future decisions.
Similarly, the firm should maintain detailed records of every business development, deal or operational professional that participated in the deal process. If, for example, getting an operations team member with expertise in healthcare helps to accelerate and close a deal in that industry, that should be tracked. Doing so will help your team be more critical of when and how it pulls key personnel into the fold and get the deal to close.
Don’t forget about your diligence efforts
All too often, private equity firms consider deals, begin the IOI and LOI processes, and hit a snag in diligence. Especially when the diligence work is outsourced, that knowledge rarely makes it back into the firm’s proprietary database. All diligence data and findings should be readily accessible in your CRM systems or virtual data rooms.
Perform a bid analysis
Keeping consistent and detailed records of the volume of bids submitted, as well as the amount, will certainly help your private equity perform discern whether or not it missed out on a deal they could have, or should have closed. No matter if the bid was too high or too low, your team will be able to use this data to more accurately submit future bids for deals of a similar size or industry.
In 2016, Sutton Place Strategies found that only 25% to 30% of companies brought to market are sold. That means that your fail rate is, in essence, everyone’s fail rate. No matter what – be sure to keep track of whether any bid was accepted. You can learn a lot about the deals that never close with anyone!
Don’t sugarcoat it
When your team loses a deal, a detailed reason for the failure should be accounted for within your CRM. That data is extremely valuable because it can be leveraged to inform future strategies and guide the way the team spends time and resources.
Whether that information leads you to halt certain business development activities for a period of time, or double-down on the existing strategy, having the visibility (backed by data) helps to better steer the ship.
In the nearly 10 years since John Warrilow’s report on Riverside’s abnormally low close rate, which mistakes does your team still make when trying to close deals? And which of the circumstances impacting the close rate does your team have in its control? Without a high-powered technology fueled by data, your firm might never know. While no tool could ever guarantee a closed deal, the key to modern private equity dealmaking is to harness data and technology so that the likelihood of close can be increase