Buy-Side M&A Masterclass Part 1 | Before You Buy: Strategy, Criteria & Sourcing

Last July, I was on a flight from Dubai to Doha. Now, a flight typically serves one of three purposes for me. Number one, I can catch up on some sleep. Number two, I can be very productive. Or number three, I could zone out for the entire flight watching some asinine movie. But unbeknownst to me, for the next 90 minutes,

I wasn’t going to be allowed to do any of those things, because I was about to meet Jennifer, a woman on a mission, papers in hand, who plopped down in her seat next to me, releasing a sigh that could have depressurized the entire cabin. I looked over at her and said, “Going home?” “Going crazy.” “Wow. You must have had a pretty difficult week.”

“I can’t remember a time where I haven’t had a difficult week.” “Business troubles?” I ventured. “Well, you could say that. I mean, this is my third trip to Doha this month. I’m meeting with my newly acquired team and my integration process is a total dumpster fire. So yeah, it is business troubles, and I’m starting to think that I’ve made the worst decision of my life.”

“So things aren’t going as planned?” “Going as planned? I mean, things are going so bad, Harvard’s gonna write a case study on what not to do in an acquisition. I mean, just a few years ago, I was waking up in the morning having fun. My business was growing, it was profitable, my people loved it. And then I got an opportunity to buy a competitor, and now I’ve got two dysfunctional businesses pretending to be one.”

As I sat there processing what she was saying, she looked over, put her papers down, smiled, and said, “Hi, I’m Jennifer, and I typically don’t dump on my fellow passengers like this.” “Jennifer, I totally get it. Now, take me back to the beginning. How did this all start?” “Well, if you looked at me a year ago, you would’ve seen a very, very different person.

I was running my software business. I’d grown into about 10 million in revenue, and then one day I got a call from an investment banker, and he said, ‘Hey, are you interested in growing your business?’ And of course, who isn’t? So I said, ‘Absolutely I am.’ And he said, ‘Well, we’ve got an opportunity for you. We’ve got a sell-side client.

It’s in your same industry. It’s in hand.’ Instantly, he didn’t even have to tell me. I knew who we were talking about. I thought to myself, this is my opportunity to do a deal. I’d always thought about doing a transaction. A lot of my friends that run businesses do M&A deals all the time. So this was my opportunity to double the size of my business.

What I didn’t realize is I had no idea what I was doing. I brought on an outside advisor here and there, and we went. The boxes got checked. I didn’t know what I didn’t know. And now I’ve realized I made the worst decision of my life. But enough about me. Seriously, this time, what’s your name? What do you do? Where are you going?”

I turned to her and said, “Hi, I’m Paul Giannamore. I’m an investment banker, and I negotiate for a living.”

Over the course of my career, I’ve seen acquisitions play a very powerful role in creating value for business owners. But I’ve also seen a lot of very sophisticated, very intelligent, and very well-intentioned people end up in the exact same position that Jennifer found herself in. And today, in the first installment of the Buy-Side Masterclass series, we’re gonna talk about how you can avoid that.

Now, over the course of this series, we’re gonna talk about buy-side M&A from nuts to bolts: from forging strategy, to sourcing deals, to crafting an offer and negotiating, to doing due diligence, and to ultimately closing the transaction. Today’s session, however, is largely gonna focus on whether an acquisition is right for you to begin with, and if it is, how to go out and effectively source M&A targets.

Now, as you know, I am a sell-side banker, right? I spent the majority of my career selling businesses, as opposed to buying them. Now, although I did work on the buy side at American Capital for a few years, the majority of my time was spent on the sell side. Buy-side skills and sell-side skills are very, very different.

For example, on the buy side, you are extremely concerned about overpaying. On the sell side, I don’t care about that. In fact, I want people to overpay for things. On the buy side, you’re really focused on due diligence, making sure that you’re not overpaying, making sure that you’re not buying something, or making sure that you’re not paying for something that you’re not actually getting. On the sell side, I don’t really care.

From a negotiation standpoint, it is very different. And later in this series, we’re gonna get into the differences between buy-side negotiation and sell-side negotiation, which are, again, two very different skill sets. But for now, when you think about acquisitions, what I want you to think about is that acquisitions tend to support business strategy, right?

So acquisitions are tactics, they’re not strategy. And I know we hear often, “our acquisition strategy is…” I’ve always disagreed with that, I think, fundamentally, because I never viewed acquisitions as a strategy. I viewed acquisitions as a tactic in support of strategy. And when you take a step back and go down to first principles here, every decision that you make as the CEO of a business really serves one or both of these following masters: increase cash flow or decrease risk. Literally every decision that you make as a CEO should do one or both of those two things. You should be focused on increasing cash flow or decreasing risk, because those are the only two levers that you have in regard to increasing value in your business. Now, increasing cash flow is easy, right?

You increase revenue, you cut costs down, you increase cash flow. Everyone kind of gets that. Now, when you talk about risk, sometimes that’s a little bit more difficult for people to grasp. So, some very basic examples of that: customer concentration risk, for example. If your business, for example, has a hundred customers, and each customer pays you $1 a year, you’re getting a hundred dollars a year of revenue from a hundred customers. Not a lot of customer concentration risk. If you’re making a hundred dollars a year and your two largest customers each pay you $25 a year, it’s half your business. And those two large customers account for 25% of your revenue each.

That’s customer concentration risk, and that impairs the value of your business, because risk and value are inversely related, whereas cash flow and value are positively, or directly, related. So you always have to keep in mind the risk profile. When you think about technology, for example, technology goes in waves, and we are now in the AI era.

So if you are still doing things like it should have been done in 1995, here in 2025 it’s a very different story. And so when you think about, like, technology obsolescence, for example, if you’re not staying on top of that, that’s a risk factor. So when you think about acquisitions, acquisitions need to support corporate strategy.

And the first question that you always need to ask yourself is, how does this acquisition solve a problem? Right? Like, what problem do we have, and what are we trying to solve? How does this acquisition tie into that? Secondly, how does this acquisition ultimately increase cash flow or decrease the risk of the business?

Now, over the course of my career as a sell-side banker, I’ve gotten the opportunity, obviously, to work with hundreds and hundreds of acquirers. I’ve also had the opportunity to sit down with hundreds and hundreds of clients, and those clients, just like you, have either done acquisitions, many of them, or certainly want to be deal guys and do acquisitions.

And I’ve had a lot of conversations with clients that were very similar to the conversation that I had with Jennifer on the airplane. Jennifer ran a great business. She was growing it rapidly. She was having fun running that business. She had a great team. She had a great go-to-market strategy, and there was a great fit.

She was sitting around one day, she got the call from the banker, “Hey, your competitor’s on the market.” There was an opportunity for Jennifer to look at this and say, “Wow, I can almost double the size of my business. I can knock out a competitor. All of my friends are doing deals. I should be doing deals. This is exciting.”

Now, I know running a business over time, it’s like Groundhog Day, right? Same thing every single day. You’re chugging along, and sometimes doing transactions can be exciting, and they can be a great opportunity for you to double the size of your business overnight. So I’m not here to entirely discourage you from doing acquisitions, but what I am going to tell you throughout the course of this series is that there are far more bad reasons to do an acquisition than there are good. Far more bad reasons to do an acquisition. And Jennifer’s a prime example of that. She looked at this opportunity and said, “I can double my business. This is exciting. This is a challenge. I could take it on.” It didn’t really support her strategy, because she bought a business that was a lower-cost producer. So she had a SaaS business, a software-as-a-service company in the finance sector. She had a specific technology that she developed. She had worked for a large company for many years. She left. She got together with a couple of founders, put this business together, developed the technology, and she was off to the races.

And by all measures, she was doing a phenomenal job. She had a competitor that had been around for, I think, 15 years longer than she had been around. This particular company was much smaller than hers, right? It was 70% of the size of her business. It had been around for a lot longer. It was growing at a much lower rate.

It was providing a similar service using antiquated technology, at a much lower price point. So it was a different customer segment. When you have a different customer segment, you oftentimes have a different employee segment, right? It’s not as exciting of a business. Employees always tend to self-select.

So employees that want to be part of an organization that’s growing rapidly and that’s exciting are very different from the employee that’s okay with the slower-growth company, maybe receiving lower wages, may not have as much excitement at the job. So when the opportunity came up for Jennifer, she thought, “Well, I can almost double the size of my business, and I can acquire a lot of these new customers,” right?

These customers of the old company, “I’ll leave this platform once I acquire the business, and they’ll be on our platform now and our technology.” What she didn’t realize at the time, though, is that’s much more difficult said than done. I mean, there was a reason why those customers never defected to her business to begin with.

They were getting a lower price at the target company, and switching costs for her service, for her business, were very high for the customers. What they were using this for, her product, was a mission-critical operation. And so there’s a high switching cost in terms of price, time, resources, as well as risk for end users to move from one of these financial backbones to another.

Many of them would have done that naturally out in the market if that switching cost didn’t exist. So now she combines these two businesses. She expects all of these legacy customers of the target to come onto her new platform, and a lot of ’em dug in their heels and said, “We don’t want to do this.” So she ultimately ended up running two separate businesses under one umbrella.

All the various synergies that she believed that she was gonna get from this acquisition, many of them dried up over time. It turns out that the employee base didn’t play well together. For example, her management team had great comp. They had equity incentives, so they had a stake in the outcome. They had a very aggressive bonus plan, whereas the management team of the target, for example, didn’t have that.

They got salary and a bonus. There was no equity, there was no upside. And when she combined the organization, of course, the target’s management wanted the same thing that she was providing to her own management team. The only difference is, her managers were far more experienced, a lot more piss and vinegar, than the target management team.

Same thing with the employees. And so there was ultimately a culture clash. One of the situations that Jennifer found herself in, which is very, very common, is not thinking about opportunity cost. Had her and her management team doubled down and really focused on their core business and not worried about an acquisition, she would’ve been further along today than where she is now, managing basically a living dumpster fire.

Now, the acquisition wasn’t all bad for her. I mean, she did grow the business. She has a larger firm. She knocked out a competitor that could easily, over time, have developed more advanced technology, so on and so forth. But it wasn’t a good use of capital for Jennifer. Number one, it wasn’t a good use of her time and her management team’s time.

Ultimately, they ended up spending a couple of years managing this mess, in a world where they could have otherwise grown organically. So when you think about acquisitions, you always need to keep in mind that organic growth, no matter how you shake it, is always better than acquisitive growth. From a value perspective, I always want to see companies that are growing rapidly, organically, as opposed to rapid growth primarily, or exclusively, through acquisitions.

One of the things that I really appreciated about my conversation with Jennifer was that she was a consummate professional. I mean, literally, she took ownership up front and said, “This was my decision. The buck stopped with me. I made a very bad decision making this acquisition. What did I do wrong? Let me think through this and learn from that.”

Throughout the course of our discussion, she talked a lot about failed integration, but I couldn’t stop thinking about the fact that it wasn’t necessarily failed integration in my mind. Sure, integration was complicated, but it was a choice issue. It was an issue of actual fit. It’s like what typically happens in a marriage, for example, right?

You idealize the other person, you get married, and neither one of you are bad people, but you project onto each other this whole idealization. You don’t have a relationship problem, you had a choice problem. You didn’t have the fit upfront. So Jennifer didn’t spend enough time thinking about what problem does this acquisition solve?

Like a lot of acquirers, she created a solution in search of a problem, right? “Here’s the solution. I’m gonna make this acquisition. Now let me back into what problems it’s gonna solve,” as opposed to forging a plan saying, “I have these growth issues, I have these problems. I can solve these through acquisitions, but I need to be very thoughtful about the acquisition candidates or targets that I go after.”

So you may be a CEO of a business today, and everyone and their brother’s doing acquisitions, right? You get on LinkedIn, you get on Twitter, you read all this stuff: “Yeah, I did this deal. I printed money. I went out and bought something on the cheap and turned around and sold it five years later. Everyone’s getting rich.” And that’s all well and good, and there are certainly a lot of examples. I can think of scores of examples where people literally printed money doing deals. They were in the right place at the right time. They were able to buy on the cheap, turn around and sell it. They bought into a declining market, sold into an accelerating market.

Like, there’s a million different reasons why these things work out. But I think those acquisitions tend to be the outliers, because if you sit down and you talk to a hundred different CEOs over the years that have made acquisitions, I think more times than not, you’re gonna hear, “Yeah, I learned a lot, but probably I shouldn’t have done that.”

And what we’re gonna talk about today is how you can avoid finding yourself in that situation. So let’s go back to first principles again. Number one, you’re trying to increase cash flow and decrease risk. Those are your two primary concerns as CEO. From that stems your business strategy. How are we gonna grow cash flow?

How are we gonna decrease risk over time? Let’s say you run some sort of a residential services business in the southeast United States, right? You’re based in Georgia and Florida, and you say to yourself, “Well, I need to grow geographically, and I can do that in one of two ways. I can greenfield some operations, right?

I can lease a new facility, hire some folks, and grow it organically, or I can go out and buy an existing operation,” right? And either of those two avenues for growth are very, very valid. Now the question is, instead of sitting back, relaxing, and waiting for somebody to show up at your door, you need to get out there and get active.

You need to build an acquisition pipeline. And before you ever start thinking about building an acquisition pipeline, you need to get very granular on what it is you actually want to acquire. You have to think about what sort of size am I willing to go after. Do I want to buy a $1 million or a $5 million tuck-in?

Is a $10 million acquisition transformative for me? Am I doing a $50 million deal? So you think about revenue from a broad-based perspective: what size of a deal are we looking for? Economics, right? We have to think about cash flow. Like, are we looking at businesses that have the similar economic profiles to ours?

If we’re running a 25% EBITDA margin, are we going after firms that have 25% EBITDA margins? Are we gonna look for ones that are perhaps less efficient, maybe a 12% margin business? And what comes along with that, of course, is probably a fixer-upper. What’s the customer profile? How similar are the customers of my firm versus those of the targets?

Culture. Culture’s a very important aspect of this. How similar is this business to my business? And what I mean by that, when I think about it from a cultural perspective, is, as I said earlier in our discussion, employees tend to self-select. Firms with high growth and a lot of potential for upside tend to attract, all else being equal, A-players. Those firms tend to attract the people who really want to grow. They wanna work hard, they wanna make a lot of money, they want a lot of career upside, they want advancement, so on and so forth. Firms that have done $2 million in revenue per year for the last 30 years do not provide a lot of upside for employees.

And those employees, of course, tend to self-select. A lot of A-players are not gonna stick around at this small $2 million shop that’s been doing $2 million forever. They’re gonna leave, and they’re gonna go off to a firm that provides ’em a lot more opportunity, right? So when I think about bare-bones, basic cultural matches and cultural mismatches, a lot of times high-growth firms have one specific culture. Mediocre, or just kind of middling firms that aren’t growing and providing a lot of opportunity will have a very different employee base, and that’s fine. But when you combine those two, similarly to what Jennifer faced, it creates a clash, because of course, the lower-performing employees want the same sorts of benefits as the high-performing employees, although they don’t necessarily wanna do the same amount of work.

I can go through a massive list of cultural issues that I’ve experienced over the years and I’ve seen firsthand, but that’s a very basic ground-floor problem that people need to think through. Like, how are people compensated? When I think about culture, to me that means, like, what’s the deal between the employee and the company?

Right? What’s the managerial structure look like? Is it command and control? Is it decentralized? What do the employees expect to be doing on a day-to-day basis? How are they treated by management? How much oversight’s involved? There’s a lot that goes into culture, but at the end of the day, for me it’s, you know, what’s that deal like?

How do we operate as employees? What can we say? What can we not say? How do we operate? What do we expect to do autonomously and not? And firms are wildly different on this spectrum, so understanding that is extremely important, because integrating two cultures can be very difficult over time. And I think a lot of times acquirers will look at this and say, “Well, wait a second, we’ve got an awesome culture. These guys are gonna be excited to be a part of our organization.” And that seems to make a lot of sense on its face. But in practice, that’s not always what happens, right? So the target is brought into a firm that operates very, very differently.

They feel alienated. There’s anxiety. A lot of times you’ll get a lot of defections, for example. And when you, as the high-growth firm that’s running things differently, start to treat those employees in similar ways that you’re treating your own, sometimes they get frosted, because they’re like, “Hey, this guy’s not me.

Why is he getting treated like that?” So I’m not a cultural expert. I am an observer of these sorts of acquisitions. So it’s important for you to think about culture.

Another broad area that you need to think about from the upfront is financials. Now, I have seen a lot of acquirers over the years get approached by a potential target. You might have a local competitor who you’ve known for 30 years, who says, “You know what? I’m about ready to retire and I wanna sell my business.”

And you say, “Well, it’s a great opportunity. I know a couple of his employees, I think they’re fantastic. I can definitely serve those customers. The old man wants to retire. Maybe I can work out a deal. I pay him over time.” That’s all well and good, but Rodney here, hot rod running this business, hasn’t done his books for the better part of the decade.

I mean, he’s using, like, a cigar box. He’s got a bunch of receipts in there, and it is a mess. You have to think about what you’re willing to be bogged down with during due diligence — unfucking his books, on a million-dollar acquisition, while you’re running a $30 million firm. Is that worth you and your team’s time?

Now, you might answer, “Yes, we can wave it off. I’ve got the resources. I’ve got the capabilities. We can get through that very quickly.” Others of you may not. So you have to think about that, because at the end of the day, you’re buying financial performance. So understanding the books, being able to diligence the books, are gonna be an extremely important aspect.

The reason I mention all these things is because I think it’s really important to put together an acquisition criteria list prior to even going out to the market. So you’ve determined what your business strategy is. You’ve figured out what sort of problems acquisitions can solve. It might be geographic growth.

You might be interested in buying different capabilities, maybe technological capabilities. You might be interested in acquiring some hard-to-reach customers. There’s a variety of business reasons why you might do an acquisition, but you’ve identified a gap, and you realize an acquisition may be the best way to solve that.

Now, I say “may” because it all comes down to the value equation, right? You can buy the best company in the world, but if you overpay for it, it’s still a bad investment. So later in the series, we’re gonna talk about price and risk and valuation, and we’ll talk about that in the offer stage and the negotiation stage.

Today, though, I wanna really focus more on this whole criteria situation.

Now, let’s say you’ve now thought through your strategy, right? You say, “Number one, I’m focused on increasing cash flow, decreasing risk. Therefore, my business strategy is X, Y, and Z. In order to accomplish my business strategy, I have specific gaps.” And those gaps might be, “I need to buy some hard-to-reach customers.

I need to get into a new geography. I need to buy some technological capabilities.” There’s a variety of different valid reasons for doing an acquisition that ties to your business strategy. Now, how do you source them? Well, you’ve got your criteria list. You’ve put this together. You said, “Okay, I’m interested in companies that do X to Y in revenue.

Here’s what the cash flow needs to be. I’d prefer to have an owner who’s retiring.” You’ve got a huge list. You’ve effectively put together a box here, and that’s gonna help you on the upfront screening of those acquisition candidates. So now you start to think about the universe of potential targets. Now, depending upon your business, this is going to vary wildly.

Like, on the one hand, if you own a lawn care business in the south-central United States, you might have two or 300 potential acquisition targets in your geography, right? I mean, there’s a ton. 50 lawn care companies in every town. So you might have a lot to choose from. You might have to say, “Okay, there’s 500 potential opportunities, and I really need to think about which ones fit within my acquisition criteria.”

And after you run that through your criteria, you might still have a hundred potential opportunities. That’s one thing. But if you run a business that’s a software business that focuses on point of sale and inventory control for the hospitality industry, you might literally have three or four potential acquisition targets globally, at least in your specific business.

Now, maybe your strategy is to move away from that, or add adjunct services to your offering, but in your specific industry, you probably could count on two hands how many potential targets there are globally. So that puts you in a very different position, and it actually makes your job easier, right? Now, when we think about the reach-out, there’s a variety of ways to do this.

And in the Sell-Side Masterclass, I talked about being a hunter or a fisher. When you’re selling your business, I told you to be a hunter. You can’t sit back and wait for buyers to come in. And this is one of those areas where you’re gonna take the same strategy on the buy side. You can be a fisher and just basically hang back and wait for people to call you up.

You can wait for bankers to say, “Hey, Paul, I’ve got a business that looks like it’s a great match for your company, you wanna buy it.” You can wait for a lawyer to call you up and say, “Hey, my client’s getting divorced,” or “you’re retiring and wants to sell the business, and we thought we’d reach out to you.” You can certainly do that.

You might end up waiting a decade for your phone to ring, but you can do that. You can hire a buy-side broker of some sort, or an advisor, who basically goes out, makes calls, sends annoying emails on your behalf, and tries to drum up some business. You can do that, and these guys will boil the ocean, and they will send out a ton of annoying form-letter emails that I know every one of you probably gets a dozen of ’em every day: “I’m engaged by a client who’s really interested in buying your business, would love to talk.” And they just sent that out to 10,000 people, right? Not very effective, but it’s highly efficient. And it’s highly efficient as far as the use of your time.

And then you can take a play from the private equity playbook when it comes to building an acquisition pipeline. If you’re gonna take the fishing approach, which is kind of sit back and wait, you’re already behind everyone else. But if you’re gonna get really aggressive, you certainly could use a buy-side broker.

But the best way to do this is actually develop your own in-house capabilities. If you’re building a business where you think you can create a lot of value by doing acquisitions, and acquisitions are one of those things that — yeah, I mean, you actually will learn a lot of things about yourself and your capabilities if you do many of them, because you are going to screw a lot of them up, because you can’t know the things that you can’t know.

And no matter what sort of advisors you bring in-house to help you, certainly they’re gonna help you out of hot water, but a lot of these lessons, unfortunately, as you and I both know, we have to learn the expensive way, through direct experience. And so that’s what will happen. And the more acquisitions you do, the better you’ll get at ’em over time.

But the private equity guys and the large corporates, they build their own pipeline of proprietary deals, and there’s a reason why they do that. So if you think back to my sell-side M&A discussion, I said one of the absolute best things a seller can do when selling his business is bring in competition.

That’s one of the best things you can do, not only from a psychological perspective — because it gives you a lot of resolve, you can easily tell somebody to go pound sand when you’ve got a lot of other buyers there, right? So it helps you from a psychological perspective. It also creates somewhat of a quasi-auction, where you’ve got buyers bidding against themselves.

So if that’s really good for sellers, it’s really bad for you, a buyer, right? So whatever’s good for the seller on the sell side is bad for you, the buyer, in a buy-side situation. So you do not want to go and deal with investment bankers if you can. I mean, I’m gonna be honest with you, when small or medium-sized firms call Potomac — they’ll call us up and say, “Hey, here’s the industry we’re looking at. Here’s our criteria. We’d really like an opportunity to work with you. If you have anything, please send it our way.” We might look at it and say it’s a small or mid-size family business. It’s conservative. I actually don’t feel good about selling businesses to them, because I know I’m gonna make them overpay, right?

I would rather make a large publicly traded company overpay, or a private equity firm overpay, than, you know, some guy running his $30 million family business who wants to do a deal. He’s gonna end up overpaying. I’m selling a great company. He’s gonna overpay for it. It is a bad investment.

So in the same way you deal with sell-side guys like me, you are naturally gonna be put into a competitive process. Corporates know it, private equity firms know it, and now you know it. So you need to avoid that as much as you can. I’m not saying you can’t get a deal from a sell-side guy. There are a lot of sell-side guys out there that have no idea what they’re doing, and they just want to close a transaction.

You may get lucky, but I think more times than not, at bare minimum, even if the sell-side advisor sucks, that seller is going to have some semblance of competition, which is gonna change the psychological calculations in his or her mind. So avoid that. Go out and build your proprietary funnel. And the way you’re gonna do that is reach out directly to potential sellers. Now,

I think there’s a lot of ways to do this. You could take kind of the buy-side broker approach, which is like, “Hey, I’m really interested,” or the search fund approach. You probably get a lot of emails from search funds, like, “We’re looking to buy one really good business and run it.” Okay, fine. You could take that approach and send out emails, but from my perspective, that’s noise, right?

I mean, I think most of those things get deleted. It’s really hard to differentiate yourself on an email, like who you are versus that. Now, they might recognize your company. You might be, like, “Oh, that’s my crosstown rival. He’s been in business 30 years. I wanna go talk to him.” But if you can figure out a way to have direct contact with the right person at the target company, and then set up a lunch or a dinner — it doesn’t have to be courtside at the Bulls and dinner at Gibson’s, it could be a simple lunch or breakfast at a diner — where you say, “Hey, I’m really growing my business, and I think your business might potentially fill a gap for me. Where are you in your journey?

Selling anytime soon? Interesting possibility for you? And if it’s not, that’s fine. You just wanna get your name out there. I am somebody who’s interested in making an acquisition. I’d love the opportunity to sit down with you. I think you have an interesting business. I’d like to dig into it a little bit more, but on its face, it seems like there could be an interesting discussion here.

If you’re open to it, great. If you’re not, fine with that as well. Here’s my number. Let’s periodically get together. By the way, I’ll help you any way I can.” If you can begin to build a personal relationship with a variety of different targets in your industry, in your geography, or whatever, the end point you’re looking at here is, I guarantee you,

you’re gonna be top of mind when these guys start to think about selling their business. They have a name to a face, you’ve spent time with them, you’ve invested in them. It’s far more powerful than a stack of 180 emails they have in their inbox.

Now, you might say, “Paul, I don’t have time to sit down and take all these guys to breakfast and lunch. I’m a busy CEO. I’m running my business.” And that’s a very valid point. You probably don’t have time for that, but put somebody on your team on the case. Somebody on your team should go out and build these relationships in order for you to have a fat acquisition pipeline, because you wanna give yourself optionality.

Now, when I think of some of the failed acquisitions that I’ve seen over the years, they tend to have a common thread, and one of those threads is optionality. So CEOs will often take a very narrow view. Take Jennifer, for example. She didn’t think through her strategy. She didn’t think through her acquisition criteria.

A book showed up at her desk: competitor’s for sale. She wanted to do a deal. She moved forward with the deal, but she didn’t look at anything else. I asked her, I said, “Did you look at any other acquisition opportunities?” And she said, “No.” “Were there any potential opportunities?” “Well, maybe, I don’t know. They weren’t on the market.”

That’s the importance of developing your own proprietary deal flow, but it’s also the importance of creating optionality for yourself, right? You want to have choices so that you can compare them. You know, in the valuation discussion I had a few weeks ago, I mentioned Starbelly.com. Ha-Lo Industries acquired Starbelly.com, and it ultimately bankrupted the business.

That disaster, that seed, grew in the mind of the CEO, who had eyes for no other acquisition candidate, no other target. “This is it. We have to do this deal. If we don’t do this deal, we’ll be in trouble.” Well, that turned out to be nonsense in retrospect, but he didn’t give himself any optionality. So I think what you need to focus on is optionality.

And if you don’t, you know, it’s akin to being on the plane. You’ve been on the road five days. You sit down on a plane, and they say, “Here are your dinner options: tofu with cilantro marmalade, or Chilean sea bass on a bagel.” Like, you want neither of those, they sound disgusting. Those are your only two options, and you’re gonna choose one of them. From an acquisition perspective, you wanna give yourself as much optionality as possible. You want to have 50 different acquisition targets to go after, not just one because the banker showed up and gave you the book. And again, similar to sell-side M&A, when a seller has 10 different buyers vying for the business, the seller now doesn’t have to concern himself with a busted deal, right?

He’s got 10 buyers. They’re competing. He’s now got some resolve. He can really ask for what he needs and wants, because he’s got a lot of buyers out there. In the same way for you, if you’ve got a variety of different acquisition targets, all of which can satisfy your needs to a certain degree, that can close that strategic gap that you’re trying to manage, it puts you in a position now to be able to bargain harder. It puts you in a position to really understand and compare and contrast two different candidates. So I would encourage you, if you’re going to get into the acquisition game, that you start to think about: how do I develop proprietary deal flow?

It is a long process, right? You don’t go out and meet with folks on a Monday and two months later you’re doing the deal. Although that’s possible, and I’ve seen it, more times than not this is a multi-year process of building relationships with acquisition partners. Eventually these folks will sell, and you’re gonna find yourself in a very, very good position to be able to buy them, because you’ve built the relationship.

You’ve spent the time with them. They’re gonna ignore the email, and they’re gonna call you. In the second installment of the private equity series, we talked about Gary, and Gary sat down with Chris and John. Chris and John worked for Cedar Fork Capital. Those two were masterful at making Gary feel like they only had eyes for him, and they built a relationship with him.

They wined and dined him. They took him out to the Bulls games. They spent time, money, and effort. They built that relationship, and he invested in them. When they invested in him, he invested in them. It was very difficult for Gary to look at any other acquirer. I mean, he asked himself, “How can anyone else do better?

These guys are spending money on me. They’re spending time with me, they’re investing in me. Why would I double-cross ’em and sell to somebody else just for a few dollars more?” It’s a very, very powerful tool in your toolkit to keep sellers from talking to other buyers, right? If they’ve spent a lot of time with you and with your team, they’re going to come to you first. And that’s the way private equity firms and corporate buyers are able to elbow out other folks from showing up in their voicemail inbox, in their email inbox.

So that’s the same approach that you should take. Strategy, criteria, pipeline. Reach out to these folks very gently, not to necessarily buy their business, but express your interest in potentially doing that — but nothing more than building your relationship. And if you do that, and you do that consistently, and you do that effectively, I guarantee you’ll have a proprietary deal

flow, pipeline. And you’ll find yourself in a position where you’re not in an auction scenario. You’re not dealing with a guy like me on the other side of the table who’s trying to fleece you. You’re gonna be dealing with a seller who has a lot of trust and faith in you. I’m not saying you should take advantage of the seller, and when we talk about valuations and structure and the offer and negotiation later on in the series, I’m gonna get into how you should think of pricing and valuation and how you can keep yourself out of hot water.

But for now, once you decide an acquisition will serve your strategic purposes, then you focus on the proprietary process.

On the buy side, you have a variety of different risks. On the front end of this, you have the risk that you didn’t tie the acquisition to an identifiable strategy, right? So you can’t, in one sentence, say why this acquisition should be done. So the risk of you not doing this on the front end is actually great.

So you need to spend a lot of time saying to yourself, “How does this acquisition, or how does an acquisition, serve my strategic purpose? We’re growing at such and such a rate internally. Here’s our opportunities without doing an acquisition. Why do we need to do a deal to help us get from point A to point B?”

And you have to put a lot of thought into that. The second risk you face is you weren’t proactive enough. You didn’t give yourself enough optionality on the front end. You didn’t build a wide enough pipeline to be able to assess acquisition opportunities, right? So, almost by definition, there’s opportunity cost to this.

Like, if you do one deal, you’re not gonna do the other one. So you need to make sure that you’ve cast a wide enough net, that you were a hunter, that you went out, you weren’t reactionary, you didn’t fish, you didn’t put your name out there as a buyer and sit back and relax. You went out as a hunter and found the various different targets that may serve this corporate purpose that you’ve spent a lot of time thinking about.

You’ve done that, now you’ve got optionality, so you’ve got a variety of different targets. There’s a risk in you not doing that homework upfront, and that’s what you need to do. The third risk you face is that you didn’t do your homework in terms of synergy. You know, when you think about an acquisition, you start to think about the variety of different purposes it’ll serve.

And a lot of folks will get excited: “Hey, I’ll cut this cost, and I’ll get some revenue enhancement here, and the combined entity will really create value for me.” And sometimes, when this happens all the way at the big corporate level, sometimes we get a little over-enthusiastic about what the acquisition will ultimately do, and we come to realize that we won’t realize all those synergies, right?

So that’s the third risk. The fourth risk, and we’re gonna talk about this heavily when we get into valuation and negotiation, is that you’re actually paying the seller, from a pricing perspective, for the value that you, the acquirer, will create. Right? So if the fair market value of a business, or what it’s worth to the actual seller, is $10 million, but when you acquire that business, you’ll get revenue enhancements and cost savings and so on and so forth, so the value of the business to you would be 15 million — there’s a danger you write a check for 15 million bucks. You might as well not have done that transaction, right, because you’ve literally just paid the seller for the value creation. So that’s a risk. The fifth risk is execution and diligence risk: that you didn’t do your homework in DD. You didn’t ask the right questions, you didn’t have the right advisors, you didn’t do the right finance and accounting DD. You have to do due diligence. You have to make sure that the check that you’re writing, you’re actually getting what you’re paying for. And so there’s a lot of snafus there in the diligence process.

The sixth risk, in broad terms, is the purchase agreement and final execution, right? You didn’t protect yourself appropriately in the final definitive documents. And then, of course, the final risk is integration risk. This is where you should have been planning integration almost from your first conversation with the seller through the consummation of the transaction, and by the time the deal gets done, you actually have an integration plan and team ready on paper to execute on that. So that’s the final one. And every one of these risk buckets, from the first one to the last one, is a massive threat to you, and it’ll destroy the reason for having done the deal in the first place.

Again, as you know, Potomac is not a buy-side shop. We’re exclusively a sell-side M&A advisor, but we actually do more buy-side transactions than we do sell-side transactions, which I know is a very bizarre concept. But whenever we have a client — a client signs up with us, and our goal is to help them build value in their business before they exit.

And I feel like the extreme majority of our clients love to do acquisitions, for better or for worse. So while we don’t charge our clients for this service, we’ve got a massive team of analysts and transaction advisory folks — so the same sort of people that do financial and accounting due diligence at some of the large firms like Deloitte, Ernst & Young, and so on and so forth.

They are part of Potomac, and they work on our team. And so what is very typical is, we’ll have a client who says, “Hey, I’m interested in acquiring company X, Y, Z. I’ve never done a deal before. How do I get started?” Well, we will help them craft an NDA for the seller. We’ll put together a financial model form, so they’ll request materials and information.

Our analyst team will put together a financial model, give them valuation. They might say, “Hey, how can I craft an LOI?” Well, they’ve got their legal counsel, but from a business perspective, we can put together an offer for them. “How do we do due diligence?” Well, we’re not gonna actually do the due diligence per se, but we have a transaction advisory team that can look at the numbers and point out red flags for the client.

And the client will, of course, have a variety of other advisors involved. But we do this probably 70 or 80 times a year for a variety of clients. I mean, I can think of one client where we’ve done probably 16 or 17 transactions for. I can think of another client who’s very interesting, and this might be interesting for you to know.

He said, “I look at 20 good deals for every one great deal I do.” Again, he looks at 20 good deals for every one great deal he does, and that doesn’t count all the trash that he probably has to wade through to see the 20 good deals. So, I’m doing this because this is a core part of our business, although we don’t charge for it.

Our clients benefit from our buy-side expertise, and I hope you will as well. Now, this is the first installment of a multi-part series I’ll be doing on buy-side M&A. Today we talked about some basics. How do you know if doing a deal is right for you? What are some things to avoid? How do you think about proprietary deal flow?

In the next installment, we’re gonna talk about valuation and structuring an offer. So, how do you think about valuing the target? How do you structure that offer? How do you draft an LOI? And we’re gonna kind of compare and contrast what I would do on the buy side with the LOI versus what I wanna see on the sell side from an LOI.

So, as a quick example: on the sell side, you want a very extensive letter of intent. The letter of intent is the roadmap to the purchase agreement, and in any M&A transaction, one massive key point of leverage for the seller is the signing of the LOI. At the signing of the LOI, leverage tends to shift from seller to buyer, and that usually happens because a seller is going from non-exclusive to exclusive, meaning all the other buyers then disappear at that point in time in the process, and the seller is dealing with one buyer. So from a leverage perspective, you wanna get everything you possibly can negotiated and put into that LOI prior to committing to diligence. Now, if you’re buying a business, though, and you’re not up against somebody like me, I would say take the exact opposite approach to that.

You wanna hand over a one-page LOI. You don’t wanna say much. “I wanna buy your business. Here’s what I think I’ll pay for it. And I want to be exclusive for a long period of time.” And that’s about it. “Here’s the confidentiality clause.” And we’ll talk about this in more detail when we get into the segment, but those are two very different perspectives, and I think you need to lean in on this side as a buyer.

And in the next installment, we’re gonna talk about my favorite topic, which is the psychology and the negotiation of a transaction. And our focus this time will be the buy side. Well, I spend the majority of my time on the sell side, but the buy side’s fun as well. And it’s very different from the sell side.

In the beginning of the Sell-Side Masterclass, I talked about books like Never Split the Difference, for example, and Getting to Yes, being not particularly helpful to sell-side M&A. And I believe that, and I live that every single day. But that sort of stuff is far more pertinent when you’re on the buy side, because on the buy side, you’re building a relationship with the seller.

If you are avoiding formal processes, you’re building a relationship with the seller to keep his blinders on. You don’t want him to introduce competition. You want him to only have eyes for you. And how you do that is build a relationship. You validate his feelings, you listen to him. So you’re taking a very different approach than the wild-west cowboy of sell-side M&A.

Now here you’re validating emotions and building relationships, and we’ll talk a lot about that in the installment on buy-side negotiation. Once we’ve drafted the LOI, we have negotiated the transaction, we’ve signed the LOI, and now we get into exclusivity. That’s the due diligence period.

So the next installment of this series will be focused on due diligence, and it can’t be all-encompassing and comprehensive. What I hope to do is point out some things to you that you might not be thinking about. What does your diligence roadmap look like? What are the key things that you really need to focus on so you don’t end up falling on your own sword?

What is financial diligence? What is accounting diligence? What is legal diligence? What is operational diligence? How do you have to think about all those things, and how do you manage those? That’s what we’ll talk about in the due diligence segment. And the final installment will be the closing and the drafting and execution of the definitive deal docs, either the stock purchase agreement or the asset purchase agreement.

These are important because you and the seller will be effectively drafting a private body of law that will govern the relationship going forward. When you buy a business, the relationship doesn’t end at the closing statement. The seller has represented to you that he or she is selling you certain things.

Number one, they have title to the assets, that there’s no fraud, that they’ve paid their taxes. There’s a variety of different things that goes into this. After the deal is consummated, you might find out you just bought a fleet of vehicles that actually weren’t owned by the seller. What sort of recourse will you have?

Is there a holdback in there? Is there an indemnity escrow? How will your life be impacted post-closing if in fact you wrote a check but didn’t get exactly what you thought you were buying? All that’s covered in the purchase agreement, and we’ll talk about that in the final segment of this series. We will be filming the remainder of the Buy-Side Masterclass series in the coming weeks.

So if you have any requests or questions, feel free to put ’em in the comments below, and I’ll do my best to answer them. And finally, as we get into the more technical aspects of buy-side M&A, I’ll be able to provide you with a variety of different items, such as a template LOI, a buy-side due diligence checklist, that I think will come in handy as you go out and attempt to make acquisitions on your own.

I’ll put a link in the description section below. You can click on that so you can be notified as soon as those are ready to go out. Here at Potomac, we love to kill it for our clients, and I think that education is the cornerstone which allows our clients to make the best decisions for themselves. The more you can understand about the nuances of how strategic acquirers work, how the operations and private equity firms work, and the psychology and the tactics of an M&A transaction, the better you are going to be when it comes time to pull the trigger. If you own a business, and you’re being contacted by a strategic acquirer, search funds, private equity firms, and you’re trying to size up what you might do, take a step back and give us a call.

We’ll help you forge a plan, whether that exit is a year from now, five years from now, or 10 years from now. We’ll help you think through a plan that is specifically tailored to your financial goals and objectives. So please contact us directly. I’ve put a link to the contact form in the description of this video, and you can also contact me directly on LinkedIn. And feel free to share this masterclass series with somebody who you think might benefit from it.

Again, I’m Paul Giannamore. Thank you for joining me today, and I’ll see you on the next one.