Understanding How To Source Deal Flow - The Right Approach

"Understanding how to source deal flow" refers to comprehending the methods and strategies used to identify and acquire potential investment opportunities, typically in the context of business acquisitions, investments, or partnerships.

Deal flow sourcing involves various approaches, such as networking, market research, direct outreach, and utilizing different platforms and resources to find and evaluate potential deals. It's an essential aspect of successful investing and business development, enabling individuals or organizations to identify and seize promising acquisition opportunities within their target markets.

Challenges Faced

Implementing a self-funded search fund model can present significant difficulties, especially when applied to the defense sector. This is primarily due to the substantial barriers to entry, intricate nature of government contracts, legal complexities, and considerable closing costs associated with the sector. Additionally, the demand for Subject Matter Experts and specialized industry knowledge is crucial, as the intricacies of our contractual commitments may extend beyond the scope of a conventional MBA.

1. High Barrier to Entry: The defense sector often requires substantial financial resources to enter due to the need for advanced technology, security measures, and compliance with government regulations. To address this, consider building a comprehensive business plan that clearly demonstrates the potential return on investment and long-term viability of the venture. This can help attract potential investors or secure loans to fund your entry.
2. Complexity of Government Contracts: Government contracts can be intricate and demanding, requiring a deep understanding of procurement processes, compliance standards, and technical specifications. To overcome this challenge, consider partnering with individuals or consultants who have prior experience navigating government contracts. Their expertise can help you navigate the complexities and ensure your bids and proposals are competitive and compliant.
3. Legal Challenges: The defense sector involves complex legal considerations, including intellectual property protection, export controls, and regulatory compliance. Engage legal experts with experience in defense contracting to ensure your business adheres to all legal requirements. Their guidance can prevent costly legal disputes and setbacks.
4. High Closing Costs: Acquiring businesses or contracts in the defense sector can come with high closing costs. Thorough due diligence is essential to accurately assess the value of the opportunity and negotiate favorable terms. Consider working with financial advisors who specialize in mergers and acquisitions within the defense industry.
5. Need for Subject Matter Experts: Having subject matter experts (SMEs) with deep industry knowledge is crucial. While an MBA provides a solid foundation, it may not cover the specific technical aspects of defense. Seek out industry veterans or professionals with firsthand experience in defense technologies, regulations, and processes. Collaborating with these experts can enhance your decision-making and operational effectiveness.
6. Industry Knowledge: To bridge the knowledge gap outside your expertise, actively engage in industry events, seminars, and workshops. Networking with professionals in the defense sector can provide valuable insights and connections. Additionally, consider enlisting advisory board members who bring specialized knowledge to your team.
7. Networking and Relationships: Building relationships within the defense industry is key. Attend industry conferences, join professional associations, and seek out mentorship from established individuals in the sector. These connections can provide insights, opportunities, and potential partnerships.
8. Risk Management: The defense sector carries inherent risks, including geopolitical factors and changing government priorities. Develop a risk management strategy that accounts for these uncertainties. Diversification of contracts, markets, and technologies can help mitigate risks associated with dependence on a single source.
9. Continuous Learning: Stay updated on industry trends, policy changes, and technological advancements. This ongoing learning process will allow you to adapt your strategies and business model to align with the evolving landscape of the defense sector.
10. Adaptability: The defense industry can be subject to shifts in technology, policy, and geopolitical factors. Maintaining flexibility and adaptability in your business plans will be important to navigate these changes effectively.
11. Long-Term Vision: Building a successful business in the defense sector through the self-funded search fund model requires a long-term perspective. Recognize that achieving substantial growth and profitability may take time due to the intricacies of the industry.

Sourcing Deal Flow

On-Market Deals:

Sourcing deals from sites like Bizbuysell, Loopnet, auctions or marketplaces etc.

Pocket Listings: These are off-market deals that brokers share exclusively with a select group of potential buyers. Engaging with reputable brokers in the defense sector who have access to pocket listings can provide insights into potentially attractive acquisition opportunities.

Expired Listings & Businesses That Didn't Sell: Businesses that were listed for sale but didn't find a buyer can sometimes be approached with new offers. These sellers might be more motivated or open to negotiation, providing a chance for potentially favorable terms.

Tip: Reach back out to deals that you didn't close but you see after 6+ months it is still listed. The seller might have changed his/her mind once the market has dictated that it is overvalued or under-marketed.

For Sale By Owner: Some business owners prefer to sell directly without involving brokers. These opportunities might be easier to negotiate and navigate, but they can also require more direct outreach and relationship building.

Tip: Search FSBO on business listing websites first before going after listings by business brokers.

Targeted On-Market Search Criteria: Based on the buyer profile and acquisition strategy, actively search on marketplaces and business listing platforms using specific criteria relevant to the defense sector. This could involve filtering by industry, revenue, location, and other relevant factors.

Tip: Reach out to all the brokers and provide a compressive investment criteria "Buy-box" and Buyer profile. Spending time building rapport with the brokerage or business broker even if the deal isn't a fit after due diligence.

Off-Market Deals:

Off market deals are the holly grail of deal flow from. If you have a refined and proven system you can Wholesale deals similar to real estate or make a sizable finders fee for just providing a deal.

One of the key benefits of being engaged in government contracting or the defense sector is the access to a wealth of publicly available information and data.

This advantage stands in contrast to professionals working in commercial industries, where information tends to be more guarded and private in nature.

Tip: If you are strapped for cash you can use a free trial of HigherGov or GovTribe to look through thousands of contractors and past performance. Including searching by NAICS Codes, Contract Vehicles, Current Status, Awarding Agencies or Grant Funding Amount and Socioeconomic Status etc. Once you have acquired your first company you can upgrade to Federal Compass, Bloogberg Government (BGOV) or Deltek (GovWIN).

1. Direct Outreach (Cold Calls & Emails): This involves proactively identifying potential acquisition targets and reaching out to them directly through cold calls or personalized emails. While this approach requires effort, it can yield opportunities not publicly advertised.
2. The "Slow-Roll" Approach Through Networking: Attending defense industry conferences, trade shows, and networking events can provide opportunities to build relationships with business owners and key industry players. Over time, these relationships might lead to off-market deal opportunities.
3. Teaming Approach: In the defense sector, strategic teaming partnerships are common. Engaging with prime/sub relationship partners can create opportunities to discuss potential acquisitions that align with their business strategies.
4. Social Media Marketing - Targeted Ads: Utilizing social media platforms, particularly LinkedIn, to run targeted advertisements aimed at attracting potential sellers who are active in the defense industry.
5. Specific Groups (e.g., Veteran or GovCon Facebook Groups): Engaging with specialized groups on social media platforms that cater to veterans or government contractors can provide insights and connections to potential sellers who have a strong industry background.
6. Special Interest Groups (SIGs): Within larger defense industry organizations, participating in specialized interest groups can help you connect with individuals who might be considering selling their businesses. These groups often foster relationships that can lead to off-market opportunities.

It's important to note that each strategy requires a tailored approach and an understanding of the defense industry's nuances. Combining multiple strategies and consistently putting effort into networking, outreach, and relationship building will increase your chances of finding attractive acquisition opportunities both on-market and off-market. Remember that patience and persistence are key, as deal sourcing in a complex process just like landing a government contract it can have can take time and require the use of resources.

Having The Right Approach

Approaching the owner or seller of a defense contractor requires a thoughtful and strategic approach. Here are some tips and an example messaging framework that can help you communicate effectively and align your intentions with their needs:

Research and Personalization: Before reaching out, thoroughly research the company and the owner. Understand their business, history, and any recent developments. Use this information to personalize your approach.

Initial Outreach Message: Keep your initial message concise and respectful. Introduce yourself, your background, and your interest in their company. Highlight the potential benefits of your acquisition, such as your commitment to preserving the company's culture, retaining employees, and driving future growth.

Example: "Dear [Owner's Name], My name is [Your Name], and I have a strong background in [relevant experience]. I recently learned about your esteemed defense contracting company and was impressed by its achievements. I am interested in discussing a potential acquisition, as I believe in the company's mission and would like to explore how we can collectively shape its future while preserving its culture and retaining the valuable team you've built."

Alignment of Values and Vision: Emphasize your alignment with the seller's values and vision. Discuss how you plan to uphold the company's core values and contribute to its continued success.

Example: "I recognize the importance of maintaining the company's culture and am committed to fostering an environment where employees thrive. I believe in the importance of [specific values or principles from the company's mission], and I'm dedicated to upholding these principles throughout the acquisition process and beyond."

Employee Retention and Future Growth: Address the concerns about employee retention and future growth. Highlight your plans to invest in talent development and provide opportunities for the team to contribute to the company's growth.

Example: "I understand that retaining the talented team is crucial to the company's success. My vision involves providing growth opportunities and ongoing professional development to ensure that employees remain engaged and motivated."

Offer and Terms: While it might be premature to discuss financial specifics in the initial outreach, express your commitment to a fair and favorable offer. Emphasize your intention to work together to create terms that benefit both parties.

Example: "I'm dedicated to structuring an offer that reflects the company's value and potential. I am open to discussing terms that align with your expectations and create a win-win scenario."

Honesty and Transparency: Be honest about your intentions and goals. Transparency builds trust and demonstrates your sincerity in the acquisition process.

Example: "Open communication is important to me. I want to assure you that my goal is to collaboratively navigate this acquisition journey, keeping all parties well-informed and engaged."

Effective Communication: Highlight your commitment to maintaining open lines of communication throughout the process. Demonstrating effective communication from the beginning sets a positive tone.

Example: "I value effective communication and believe that our collaboration will be based on transparency and mutual understanding. I am committed to keeping you informed at every step of the process."

Funding and Execution: Briefly mention your ability to execute the acquisition successfully, showcasing your funding readiness and operational expertise.

Example: "Rest assured that I have the necessary funding in place to execute this acquisition. My background in [relevant skills or experiences] equips me to lead the company into a successful future. - Here's the POF or POC for my bank/funding source."

Remember that your approach should reflect authenticity and a genuine interest in the company's well-being. Tailor your messaging to the specific situation and the individual you're communicating with. Be prepared to address questions and concerns and to have a deeper conversation about how your plans align with the seller's objectives.