How to Approach Proprietary Deal Idea

JJJ12's picture
Rank: Senior Monkey | 93

Just curious to get people's opinion on how they would approach the following situation:

Recently joined a LMM PE firm as an Assoc. A close family friend of mine owns a great company to acquire, yet I do not if he is willing to sell anytime soon. He is rather old, Id say 63, so he is inching towards retirement. The company is a great acquisition target, as I know the Top line they bring in and the sustainability of the business itself, with reoccurring revenue and very minimal capex. Given that he is such a close family friend, I know a potential conversation could lead to the right outcome if approached correctly. Any ideas on how you would frame this discussion without coming across wrong?

Comments (19)

May 1, 2019

Is your question how to frame the discussion with your firm or with the target? You need to know he is a willing seller before pitching it internally.

May 1, 2019

The seller. I already know it is a lucrative opportunity after many discussions we have had throughout the years.

But even if he inst ready to sell, I want him to know that I could be a potential contact should he want to exit in the near term. My main concern is coming across too pushy.

May 4, 2019

If it were me, I'd continue to build the relationship with common check-ins, lunches/coffees every month or so(maybe every quarter). I'm sure the guy knows you work in PE and even a casual conversation would reveal that his business might be a good fit for your firm. If it's really a good fit with your firm, start telling him about the deals you work on, how you've created value at the businesses you work with, or maybe in his case, tell him how you've acquired businesses from founders before and how great of process it was.

Once the relationship has strengthened enough I'd ask him what the future of the business holds. What's his succession plan? Has he ever considered selling? If so, to who? Keep in mind his exit goals and start to tailor your pitch to his. He wants to exit, but remain on the board? Tell him that's something you've done a bunch of times with success, you get the point.

After that, there's isn't much you can do, sourcing proprietary deals takes years, the best you can do is hang around the hoop and slowly convince him that when the time comes, you would be the best capital partner for him and his company. Send him relevant news articles, potential add-ons for his business, invite him to firm events, etc.

Or...after years of staying close with him, one day you send him an email and a banker responds. Turns out he's selling the business...but has hired a banker to run the process. You put in a bid and are outbid immediately by a bigger firm. Welcome to MM Private Equity.

    • 5
Most Helpful
May 4, 2019

@mrharveyspecter's is the perfect answer.

I'll give you an imperfect one that doesn't even come to mind for a lot of people.

You could buy the business yourself, either through a search fund model or through a fundless sponsor arrangement with an established fund.

The advantage of the former is that you own all the equity upside; the disadvantage is that if you're out-of-network with the audience that understands deals in this model, it can be time-consuming to get the thing stitched up.

The advantage of the latter is that you're immediately good-to-go on the financing side since your partner firm is capitalized; the disadvantage is two-fold ... (a) you give up all the equity value by putting yourself in the position of a mere promote, and (b) you have to split that promote 50/50 (at best) with the partner firm.

Regardless of which model, if you're interested, here's how to do this.

Tell him you want to take him to lunch sometime for advice. At lunch, tell him how excited you were to begin your new role at the fund. It was a great opportunity to develop your skill-set as an investor, start to understand the nuance of management by supporting the portfolio executives, and hopefully have the chance to bring some transactions in of your own.

You've found that, like everywhere in life, the reality didn't perfectly match your hopes going in. You are growing more interested in the operational side of things, and given how well he's been able to perform as the founder of a business that's scaled well, you want to ask if he can begin mentoring you by sharing his knowledge over a weekly breakfast.

This is great for a number of reasons. If he's at all receptive and agrees to recurring meetings, you're getting:

  • valuable knowledge for free
  • building a strong relationship that allows you to position the deal as an opportunity for your day-job firm
  • learning the nitty-gritty of his business (if you're smart and steer the questions you ask in response to lessons he shares towards real-life examples he faces inside the company) such that you'd be going 100mph the moment you acquired it personally if that's the route you choose to pursue

Do those meals for 6-12 months. If you continue to be confident about his company, plant small seeds every now and then. Mention that you're continually shocked at how much you get to learn in an executive's seat as opposed to being low man on the totem pole at work. Mention how you saw a great executive transition in one of your portfolio companies between one CEO and his replacement.

All these little things will hopefully take root in his mind such that you can easily close the loop by suggesting you guys partner together somehow.

You can ask him if he'd sell you the company outright. Know that to do that though, he's got to be the kind of guy who's an all-or-nothing guy. Most lower middle market operators haven't ever known anything else, so what you'll find is that they have no way at all to envision what they'll do without the company occupying them.

You can also ask him if he'd let you be his partner. This usually means you buy in for 20-50% of the business. If he's amenable to going 50/50 with you, this is an acquisition. You obviously don't use that word with him, but you draw up the documents such that it's a sale with 50% seller rollover, or better yet, earn-out. You do it in a friendly, honest, above-board way, but the idea is that you're papering a definitive agreement whereby there are milestones for you to buy the remainder of the business.

If you succeed in either route, now all you've got to do is put an exclusivity letter on it (I'd recommend 180 days since this is your first time to it) so you can go secure the financing.

You can either walk into a middle market sponsor's office and present it as an investment opportunity that you want 1-and-10 or 1-and-15 on and a paper agreement as a co-manager (you can also do this at your day-job, but that's the full balls-to-the-wall approach where you know you're likely to get fired), or you can go the search fund route. Right now the banks that lend into search deals will do 50% LTV, so if you were doing a deal with 50% seller roll or earn-out, you can put literally zero money down. This leaves you the entire equity upside.

Good luck. Sourcing is the rarest skill in private equity. A lot of guys suck at it. My thesis personally was that if I had legitimately compelling deals that made sense to do, I was better off figuring out how to build the remaining skill-set (legal process, securing financing, board management, middle office, etc.) over time.

There's obviously lots of ways to skin the cat, but there's nothing wrong with taking measured, careful steps to figure out how to capture more of the value for yourself earlier in life. Some of my most popular posts on this site reference a number of the guys I know who are running multiple assets simultaneously through varied and different structures.

If ten years from now you had done two deals through a search fund model, three as a fundless sponsor co-managing with a bigger firm, one as a fundless sponsor with a proprietary LP, and one startup you built and financed from scratch yourself ... you'd simply be part of an interesting and narrow tranche of self-starter guys who are agnostic as to how they get the deal done as long as they enjoy the locus of control over it.

Good luck.

    • 7
May 12, 2019

Hell, man. I think I bookmark everything that you post. Not sure there's a purpose to bookmarking your posts at this point, as I may just visit your profile and read directly from there.

To your point about sourcing being the rarest skill and a lot of guys sucking at it: why do they suck at it? Where do they go wrong? What could they be doing better? Is it mostly a matter of coming from a background that gives you more access to entrepreneurs/owner-operators than the average American? What can junior IB guys before entering PE be doing to become better equipped to source in the future?

Primarily referring to the MM/LMM space.

    • 1
May 12, 2019

Most people seem to have a poor grasp of the psychological levers that drive decision-making. Fewer people seem to have developed any muscle memory around manipulating those levers.

Let's use an example from pop culture. The dialogue in Billions has gotten really contrived and clunky lately, but there was an episode early in Season 2 where Axe talks about how he gets whatever he wants:


The way I see it is never give them a reason to say 'no' - because if you take 'no' out of the vocabulary, 'yes' is the only word left."

I truly believe it has very little to do with where you come from, who you were exposed to, or the advantages your upbringing afforded you.

It has everything to do with whether you're systematic about analyzing what parts of a person's psychology would make them disinclined to act in your favor.

In my advice above, you can see how we've removed:

  • personal unfamiliarity (through a recurring rhythm of meals and conversations)
  • unfamiliarity with the business (through directed questions about mistakes or lessons the entrepreneur's gained from his own business)
  • mistrust of someone who's a private equity investor (through commiseration over how constrained in his day job he is)
  • fear of being bored without anything to occupy his time (by proposing a 50% sale or a sale with seller rollover)

I could go on but you probably get the picture. A lot of people will go "That'd be a cool business to buy" but never pick up the phone, walk through the front door of the place, or find a way into a conference room. Of those that do, a lot get stopped out at the first hint of disinterest.

Thanks for the kind words, that's really nice of you.

    • 4
May 12, 2019

This sounds like the Ross gameplan to get Rachel. Weekly breakfasts for 6-12 months?!?!? Sounds like a sick joke.

How about "hey man you got a great business, would love to take a look when you're ready to sell"

99% sure you'll get a positive response. Its not that hard.

    • 1
    • 3
May 12, 2019

How's that work for you?

May 12, 2019

Good so far..haven't had 52 breakfasts with just one company with 0 guarantee it's actually going to be an actionable deal

    • 2
May 13, 2019

Then they say "sure thing, we'll put you on our list of interested parties". Then a few months or years down the road, when they're deciding what to do with the business they're either going to

  1. Get a banker and just hand over the list to them and ask them to get the highest price/best offer
  2. Think of who has shown the most interest in the business, who understands the business, who they have confidence they can get a deal done with, who they trust, etc and that for sure won't be you. You haven't differentiated yourself from the 50+ others who have reached out and done the exact same thing.

I can guarantee you the business isn't going with the person/firm that sent a single email and is waiting for the founder/CEO to just ping them back and tell them they're ready to sell. If you're willing to pay the highest price through a process, that's another story.

There's a very low chance you'll end up with any good proprietary deals with that type of approach.

    • 2
May 13, 2019

Ross and Rachel end up together, FWIW

May 14, 2019

I would trust the greatest poster on WSO over a regular random PE associate, and I'm sure others do to.


Mar 23, 2020
Pierre Ortiz:

I would trust the greatest poster on WSO

Hey, I've been gone for about a year, started digging through my inbox here during conference calls and found this notification. That's really kind of you. I hope you're doing well, and if you're working from home due to the pandemic or still in school and had the semester moved online, keeping sane and fit.

May 13, 2019

Per above posts:
Different strokes for different folks, but I imagine most would suggest somewhere in the middle (quarterly meetings -- more frequent than annual, less frequent than weekly). Would depend wildly based on personality of both (potential) buyer and seller.

May 14, 2019
    • 4