Deal origination for off-market acquisitions of sale-ready online businesses involves working with your network, open-source and closed community research, and deal sourcing through multiple channels, partners, and platforms.
As a potential buyer of an online business, you want access to the best possible acquisition targets before everyone else. Hence the popularity of off-market deals, instead of going through online brokerage platforms.
TL;DR:
- Deal origination is a skill that relies on knowledge, a trusted network, and research abilities.
- It’s not easy to source viable, purchase-ready off-market deals in the online business space when the competition involves brokers, online sales platforms, and even Twitter (X), where some founders simply advertise their projects for sale.
- For off-market deals, we only focus on sale-ready, seller-financed SBA-guaranteed loan (Small Business Association) businesses whose owners are ready for due diligence and to sell to an aligned and equally prepared buyer.
There are over 33 million small businesses in the U.S. right now, and every year around 0.5 million are bought and sold. BizBuySell.com and U.S. governmental data confirm that “roughly 500,000 businesses change hands each year.”
A lot of business owners don’t want to advertise that they’re considering selling. This can be for any number of reasons ⏤ not wanting to let customers, staff, suppliers, or competitors know, or embarrassment if the business is struggling ⏤ so they prefer to do the deal off-market.
The challenge is: How do business owners sell without advertising they’re for sale?
And equally, how do buyers find businesses that are for sale when they’re not being actively promoted?
In this article, we take a closer look at deal origination for off-market small businesses, and why it pays to work with a deal-flow sourcing partner, with an active network of business owners looking for buyers.
Let’s dive in . . .
What is Deal Origination?
Deal origination ⏤ especially when merger & acquisition (M&A) deals are off-market ⏤ is the process of finding businesses that want to be acquired.
Small business owners and founders want to sell for numerous reasons, such as retirement, wanting the money for a big life event (e.g., buying a house), or to invest in a new startup project. At the same time, buyers ⏤ such as Private Equity (PE) firms, business aggregators, and serial entrepreneurs ⏤ are actively looking for acquisition targets.
However, finding businesses that want to be bought but aren’t advertising the fact is challenging, time-consuming, and not everyone who’s in the market has time to do this themselves.
A house with a “For Sale” sign is obviously on the market. One that doesn’t have a sign in the front yard, isn’t with a realtor, and isn’t online with a price and more details is harder to find. That’s the purpose of deal origination, especially when it comes to off-market M&A online business deals.
What are Off-market Deals?
According to the U.S. Census Bureau and SBA, there are over 33 million small and medium enterprises (SMEs) in America, and 99% of these employ under 250 people, officially classifying them as “small” businesses.
At Falcon River, we work almost exclusively with online businesses ⏤ software companies (SaaS), eCommerce, direct-to-consumer (DTC), apps, Shopify stores, franchises, Amazon stores, and niche websites ⏤ and the vast majority are founder-led with small teams.
Not everyone who wants to sell their business wants to advertise this fact. This could be for any number of reasons, including already having a list of potential buyers in mind. So, these business owners go “off-market”, which could involve working with a broker or an M&A listing website without actually being listed as for sale.
Business owners could attempt to value and pitch their own business to larger players in their sector. However, this could prove difficult, and they could miss out on a lot of potential buyers they’re unaware of, and might fail to achieve a valuation that accurately reflects all of their hard work.
We offer an alternative solution. Falcon River connects interested and active sellers with engaged and cash-ready buyers. We only make introductions when both parties seem suitably aligned.
Our experienced team can only do this through having a proactive deal origination process, network, and pipeline.
Here are the seven stages of a proactive deal origination pipeline for online off-market businesses.
How are Off-market Online Business Acquisition Deals Sourced?
- Networks, connections, partners, and referrals
Every business transaction relies on trust. Especially when you’re buying or selling a business for large amounts of money. Our team starts deal sourcing amongst our trusted network of partners, people we’ve done business with in the past, and those who refer deals to us.
We are proactive with networking. It makes sense to monitor for the sound of interesting deals coming to the market (even when they’re not going to be listed on any marketplace), and even if we don’t have a good buyer-fit for a particular deal, it’s useful to be aware of them.
We also refer business to partners too, maintaining a steady stream of information, transactions, and goodwill amongst those we work with on a regular basis. When buying and selling businesses, nothing is more important than trust and an extensive network, so we actively cultivate this for the benefit of every buyer and seller who puts their trust in Falcon River.
- Open-source and social network information sources
The next stop in a deal-sourcing pipeline is public information sources. People might mention that they’re thinking of selling their business, especially on platforms such as Twitter (X), LinkedIn, and even Reddit.
It’s a smart strategic move as a deal-sourcing provider to keep a watchful eye for “sell indicator” signals. Identifying potential deals before they go to market is a big advantage, that way we can talk to soon-to-be sellers before they list their businesses on M&A platforms.
- Closed communities and newsletters
Closed communities and newsletters are becoming increasingly popular amongst online business owners and those who participate in the ecosystem.
As a deal-sourcing partner, we take time to engage in online communities, listen to podcasts, and sign-up for newsletters. Through these channels, we hear about interesting founders working on exciting projects. We’re equally attuned to founders who are struggling, and solo-preneurs and indie makers who are looking for a way to offload their current project/company.
Every channel is a valuable information source. Tuning into multiple information sources is an advantage as this regularly uncovers new opportunities.
- M&A and funding platforms
M&M and funding platforms, such as PitchBook can be valuable sources of information for private market deals, including angel investments and venture capital (VC) funding rounds.
As part of deal sourcing, we monitor these platforms and marketplaces and track the performance of companies over time to analyze when some could be looking for a potential buyer.
In this market, not every online business secures follow-on funding or achieves profitability, and in these cases, an acquisition is an ideal exit strategy for all concerned. That’s why it’s always worth deal-sourcing partners to keep a close watch on M&A and funding platforms.
- Online website brokerages
As we’ve mentioned, not every business owner wants to list they’re for sale online. However, many don’t know there are other options. We work with online website brokers who sell 90% of the deals we refer them if we can’t find a buyer.
The flipside of this is, that brokers will refer us to potential businesses to sell before they list them. That way, if we have a buyer who’s a good fit for a particular business then a deal can be done off-market without it having to be listed online and advertised.
An off-market deal like this is better for everyone, as the buyer and seller can negotiate without other interested parties, and the owner gets to sell without having to promote the fact their business is for sale.
- Verify a business is sale-ready and legitimate when it’s an off-market sale
No reputable deal-sourcing partner or broker would or should make an introduction to a potential buyer without making sure a business is sale-ready and legitimate first.
Reputation and trust are everything in this line of work, and we want buyers and sellers to have trust and confidence in our reputation. So, we always do our own due diligence and ask a lot of questions before agreeing to represent any business owner who wants to sell off-market (see list below).
Once we’re confident that a business is sale-ready and legitimate, then we start the introduction process.
- Make sure a seller is prepared for due diligence before an introduction to a buyer is made
At Falcon River, we are committed to making sure every introduction is the right one. We only introduce buyers to sellers who are clearly interested, and motivated, and where we see a strong alignment.
As part of this commitment to ensuring both parties are ready, we check that a seller (business owner) is prepared for due diligence before an introduction is made.
We’ve put together this article that includes a checklist of what sellers need to have ready for an acquisition. We encourage sellers to have the following ready:
- Sale-ready accounts prepared, including current cashflow, cash-on-hand, P&L, balance sheet, and receivables. Bank statements and projections too are often useful, to show Discounted cash flow (DCF).
- An NDA, a Confidential Information Memorandum (CIM), and a Letter of Intent (LOI) are prepared.
- Documents and evidence outlining what the business does, revenue streams, staff, suppliers, vendors, customers, any intellectual property (IP), and future growth opportunities and potential.
- Confirmation that the business is pre-qualified for a seller-financed SBA-guaranteed loan (Small Business Association).
- A realistic valuation ⏤ potentially one prepared by a professional valuation analyst ⏤ that factors in revenues (MRR, ARR, retention rates/churn, the size of the market, etc.), assets, liabilities, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), and discounted cash flow.
- Comparable valuations for businesses doing similar revenue and profit numbers in the same sector.
Plus anything else that will help a potential buyer assess the value of a business, and crucially, its post-purchase growth potential.
For example, a buyer might want $3 million for a business doing $1M ARR (annual recurring revenues). However, given its assets, market position, and growth potential, it could be worth $50M in 5 years, making it a very attractive acquisition target.
Advantages of Working With a Deal-Sourcing Partner
Attempting to DIY M&A deal sourcing, such as keeping a watchful eye on every marketplace is time-consuming. Plus, it’s hard to find what you’re really looking for, and as soon as something suitable lands on the market you’re competing against other potential buyers.
We always recommend you look for deal sourcing partners that:
- Go after solid targets. When you’re clear on the type of business you want to buy we can make more accurate searches and introductions.
- Source best-fit off-market opportunities. Tailoring our searches to what you’re looking for.
- Limit bias for all parties. Unlike brokers, we don’t take fees from sellers. We always want buyers and sellers to benefit, and to be a long-term partner for the successful transition and continued growth of the business after the acquisition.
Key Takeaways: Deal Origination Explained
Deal origination, especially when deals are off-market is the sometimes difficult process of finding businesses that want to be acquired. Here is how off-market deal origination happens:
- Networks, partners, referrals, and simply knowing who’s in the market and who are the right people to talk to about potential deals.
- Online communities, listening and watching for the right conversations and posts about founders looking to sell.
- Closed, private communities and newsletters.
- M&A and funding platforms. Watching out for businesses that need to sell because of current market conditions.
- Working with online website brokers to find potentially buyer-aligned deals before they list them on marketplaces.
All of these avenues combined can generate fantastic opportunities for buyers and sellers. It’s all about being positioned in the right place at the right time to find and source the most attractive opportunities for business owners looking to sell to motivated buyers.
