Consulting with industry experts during the investment process has traditionally been a key focus in later phases of a deal. In many cases, experts aren’t consulted until well past LOI. Finding the right expert can be time consuming and, if relying on a traditional expert network, costly.
However, there are myriad benefits to reaching out earlier in the deal cycle. We look at why purposefully connecting with experts early and often can streamline and accelerate deal pipelines, raise confidence in continuing with a given investment opportunity, and result in more completed deals.
Discovery/Thesis Work
Discovery, also called thesis work, is the early exploration of a market or industry. Thesis work is conducted to get clarity to enter a new or adjacent space, regardless if a specific target company is in sight.
Discovery is advantageous in today’s dry powder-laden market. It provides insight on which industries a firm should target, and which industries, or companies, they might consider in complementary markets. Building a solid thesis on a market drives purposeful focus to invest with confidence.
Many investors tackle discovery research on their own, which can be inefficient and usually fails to turn up anything comprehensive. Relying on previously published articles and material, investors can glean some level of understanding, yet often fail to gain true depth of understanding.
For example, while researching dental office franchises an investor might look at which type of office would be best to pursue: pediatric, cosmetic, family, etc. Market research may be available online; however, chances are the insight it offers won’t be comprehensive enough to make an informed decision.
Speaking with a seasoned current or former c-level operator who has first-hand experience in the market is invaluable. Instead of spending hours, or days, Googling and reviewing outdated research, investors can tap a knowledgeable expert with a unique perspective not found anywhere else. When it comes to researching a new opportunity, there is no replacement for a well-informed industry expert who can help investors build deep understanding.
Get to “Yes” or “No” More Quickly
Seeking insight from an industry expert can quickly help an investor decide whether a potential deal is worth further effort. Of the hundreds, if not thousands, of deals viewed per firm each year, how does one more effectively get to those precious few deals that close? Engaging an expert very early in the cursory review phase removes unpalatable deals making more time for deals with true potential.
The goal of this early, gut-check step is to quickly reject any deals that don’t align with the aforementioned discovery and thesis work. The easiest way to facilitate this culling is to reach out to an industry expert with high-level, but still specialized, knowledge about the market under consideration.
At this stage, before too much time or energy is expended, it is much easier to narrow pipeline focus. It’s decisive moves like this that allow an investor to maximize their time in order to focus on outstanding investment opportunities. It may seem counterintuitive, but the ability to walk away faster is worth the investment in a few hourly expert calls.
Initial Diligence
Another pre-LOI step that can benefit from the input of industry experts is pre-diligence.
We have seen that a critical time to engage an expert is right after receiving the CIM. It’s common knowledge that the CIM is crafted to show the target company in its best light. So why wouldn’t an investment team immediately get under the CIM’s veneer to level the playing field?
While initial diligence is generally financial/LBO model centric, ideally it would also include consultation with industry experts about the market, the target company, its customers, competitors, supply chain, etc.
If the firm has the opportunity to meet with the management team of the target company, the firm’s financial models and information gathered from industry expert interviews are a huge boon in creating a thoughtful due diligence question list. The more informed an investor is at this stage, the more confidently they will proceed, which ensures they will stand out in the acquisition process.
For many firms, pre-LOI is the “last chance” to abandon a deal with minimal loss of time and resources. Be informed and able to ask the right questions at the onset by connecting with industry experts through InquireOf.
