Deal Sourcing
Proprietary vs. auction processes and how PE firms build their deal pipeline
~20 min read
Before a PE firm can create value, it has to find a company to buy. Deal sourcing is the process of identifying, originating, and qualifying potential acquisition targets. It is the top of the funnel in private equity, and the quality of a firm's sourcing effort directly determines the quality of its investment opportunities.
Most PE professionals spend the majority of their time on sourcing and screening, not on closing deals. A typical middle-market fund might evaluate 500-1,000 opportunities per year, issue 20-30 indications of interest, submit 10-15 formal bids, and close 3-5 transactions. That conversion rate of roughly 0.5-1% from initial look to closed deal tells you something important: the ability to efficiently filter and prioritize is just as valuable as the ability to find new opportunities in the first place.
The Sourcing Spectrum: Proprietary to Broad Auction
Deal sourcing exists on a spectrum. At one end is the proprietary deal, where a PE firm is the only buyer at the table, negotiating directly with the seller without competition. At the other end is the broad auction, where an investment bank runs a structured sale process, distributing a teaser to hundreds of potential buyers and soliciting competitive bids. In between are limited auctions (5-15 invited buyers) and bilateral negotiations. The position on this spectrum has a direct impact on valuation: broad auctions drive higher prices because of buyer competition, while proprietary deals often transact at lower multiples because the seller is trading price certainty for speed and simplicity.
The Auction Process
The most common way that mid-to-large private companies change hands is through a structured auction run by an investment bank (also called a sell-side advisor or intermediary). Here is how a typical auction unfolds:
- Engagement. The seller hires an investment bank to manage the sale. The bank prepares marketing materials, identifies potential buyers, and manages the timeline.
- Teaser distribution. The bank sends a one-to-two page anonymous summary (the 'teaser') to a targeted list of potential buyers. The teaser describes the business in enough detail to generate interest without revealing the company's identity.
- NDA and CIM. Interested buyers sign a non-disclosure agreement (NDA) and receive the Confidential Information Memorandum (CIM), a detailed 50-100 page document describing the company's operations, financials, market position, and growth opportunities.
- First-round bids (IOIs). Buyers who want to proceed submit an Indication of Interest, which includes a preliminary valuation range, proposed deal structure, and high-level diligence plan.
- Management presentations. A subset of bidders (typically 4-8) are invited to meet management and ask detailed questions about the business.
- Second-round bids (LOIs). After further diligence, remaining bidders submit a Letter of Intent with a specific price, markup of the purchase agreement, and detailed terms.
- Exclusivity and confirmatory diligence. The seller grants exclusivity to one bidder, who completes final due diligence.
- Closing. The deal closes, funds transfer, and ownership changes hands.
Primary Deal Sourcing Channels
Investment bank auctions
Sell-side advisors run structured processes for companies being formally marketed for sale. This is the most common channel for deals above $100M in enterprise value. Competition is high, but deal quality and information are strong.
Intermediaries and brokers
Smaller M&A advisory firms and business brokers handle lower middle-market deals ($10M-$100M EV). They operate similarly to investment banks but with less formality and smaller buyer lists.
Proprietary outreach
PE firms proactively identify and approach companies that are not for sale. This requires deep sector knowledge, executive relationship networks, and persistence. Conversion rates are low, but multiples paid are often lower because there is no competitive pressure.
Relationship network
Referrals from accountants, lawyers, wealth advisors, lenders, and industry executives who know business owners considering a sale. Many middle-market deals originate through these informal channels.
Thesis-driven sourcing
The firm identifies a specific sector or subsector thesis, then systematically maps and contacts every relevant company. This approach combines proprietary outreach with a top-down strategic view.
Investment bank auctions
Sell-side advisors run structured processes for companies being formally marketed for sale. This is the most common channel for deals above $100M in enterprise value. Competition is high, but deal quality and information are strong.
Intermediaries and brokers
Smaller M&A advisory firms and business brokers handle lower middle-market deals ($10M-$100M EV). They operate similarly to investment banks but with less formality and smaller buyer lists.
Proprietary outreach
PE firms proactively identify and approach companies that are not for sale. This requires deep sector knowledge, executive relationship networks, and persistence. Conversion rates are low, but multiples paid are often lower because there is no competitive pressure.
Relationship network
Referrals from accountants, lawyers, wealth advisors, lenders, and industry executives who know business owners considering a sale. Many middle-market deals originate through these informal channels.
Thesis-driven sourcing
The firm identifies a specific sector or subsector thesis, then systematically maps and contacts every relevant company. This approach combines proprietary outreach with a top-down strategic view.
| Proprietary Deal | Limited Auction | Broad Auction | |
|---|---|---|---|
| Number of buyers | 1 | 5-15 | 50-200+ |
| Typical entry multiple | 6-8x EBITDA | 8-10x EBITDA | 10-14x EBITDA |
| Timeline to close | 2-4 months | 3-6 months | 4-9 months |
| Information quality | Variable (seller-provided) | Moderate (CIM + mgmt meetings) | High (full data room) |
| Seller's motivation | Speed, certainty, relationship | Balanced price and certainty | Maximum price |
| GP advantage | Lower price, relationship control | Moderate competition, good access | Best information, but highest price |
Thesis-Driven Sourcing in Action: Veterinary Clinic Roll-Up
A middle-market PE firm develops a thesis that the veterinary services industry is ripe for consolidation: the market is fragmented (80%+ independently owned), pet spending is growing 6-8% annually, and owners are aging into retirement. The firm hires a junior team member to build a database of every veterinary practice in the Southeast with $2M+ in revenue. They identify 400 potential targets, send personalized letters to each owner, and follow up with phone calls. Over 18 months, they have meaningful conversations with 60 owners, submit IOIs to 12, and acquire 4 practices as the foundation of a platform. Because none of these practices were 'for sale' through an intermediary, the firm pays 5-6x EBITDA instead of the 9-11x that auction-marketed veterinary platforms command. This is the power of thesis-driven, proprietary sourcing: lower entry multiples and a strategic acquisition pipeline.
Composite based on publicly disclosed veterinary roll-up strategies (e.g., NVA, VCA)
Deal Flow Metrics: Measuring Sourcing Effectiveness
Sophisticated PE firms track their sourcing funnel with the same rigor that sales organizations track their pipelines. Key metrics include:
- Deals reviewed — Total opportunities that received an initial screening (target: 500-1,000+ per year for a mid-market fund).
- IOIs submitted — Formal expressions of interest sent to sellers (target: 20-50 per year).
- LOIs submitted — Binding or semi-binding offers with specific terms (target: 5-15 per year).
- Deals closed — Completed acquisitions (target: 3-6 per year).
- Conversion rate — The percentage of reviewed deals that result in a closed acquisition (typically 0.3-1.0%).
- Proprietary mix — The percentage of closed deals sourced without a competitive process (top-quartile firms target 30-50%).
- Average entry multiple — The mean EBITDA multiple paid across closed deals; lower is better when comparing sourcing effectiveness across vintages.
Tracking these metrics over time reveals whether the firm's sourcing engine is improving, deteriorating, or merely keeping pace with an increasingly competitive market.
Quiz: Deal Sourcing
6 questions · ~3 min