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M&A: A Practical Guide to Doing the Deal, 2nd Edition by Jeffrey C. Hooke

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CHAPTER 8 Finding a Deal: Likely Results of a Search

If a buyer contacts 100 candidates, it should expect to make just two offers, after conducting all the search and follow-up effort. That means 98 contacts went nowhere, so the process involves a lot of frustrating legwork.

The buyer has set up its proactive search program. Its management has provided intermediaries with the buyer’s acquisition criteria, and it has implemented a methodical in-house search to develop acquisition candidates aside from those presented by intermediaries. The effort results in 100 or more candidates. So how does the buyer narrow the field? How does it reduce this list to the few potential acquisitions that merit serious, and sometimes expensive, study? It is critical that the would-be buyer has a realistic system for separating the wheat from the chaff. Most acquisition ideas are unsuitable for one reason or another, and the buyer’s objective is to eliminate the castoffs from consideration as soon as possible, based on whatever information is on hand.

For starters, the vast majority of the 100 candidates will have been gene­rated by the buyer itself. The majority of candidates shown by intermediaries are unsuitable, as they are neither direct competitors nor appropriate product line extensions. Of the 100 candidates contacted by the buyer, only 20 will want to talk, indicating a slim hit ratio. The seller and these candidates will sign a nondisclosure agreement (NDA) and then exchange information. ...

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