Every M&A buyer knows they would prefer proprietary deal flow. The pitch for going off-market is obvious: no competing bids, no banker managing the process with a coached seller on the other side.
But the preference often stays a preference. Sourcing proprietary deals is harder than responding to an investment banker's CIM. It requires infrastructure that most firms have not built. So the belief that proprietary sourcing is better does not translate into a meaningful sourcing shift. The firm keeps doing what it has always done and occasionally gets lucky with a direct owner introduction.
The case for proprietary sourcing is about the economics, and understanding those economics is what converts the belief into the infrastructure investment.
01. What Auction Pricing Actually Does to Returns
In a competitive auction, the seller's advisor has one job: maximize the price. They do this by creating a market: distributing a CIM to the widest credible buyer pool, running a structured process with a bid deadline, and using competing bids to extract the highest possible multiple from the winner.
This process works well for sellers. For buyers, it compresses returns before the deal closes.
GF Data, which tracks private capital transaction data across hundreds of completed lower-middle-market deals, has shown that banker-intermediated processes produce higher purchase price multiples than bilateral negotiations. Through recent reporting periods, average purchase price multiples in intermediated processes have run higher than those in bilateral transactions in comparable verticals and size ranges.
The multiple differential matters because it compounds. A deal purchased at 7x EBITDA instead of 5.5x requires more margin improvement or revenue growth to achieve the same IRR. That operational burden is locked in before the deal closes.
02. The Convergence Problem With Intermediated Flow
The auction effect extends beyond price. It drives convergence.
Every buyer in an intermediated process is looking at the same information. The seller's advisor prepared the CIM. The data room contains what the seller chose to include. The management presentations follow a structured format. The representation is that the business is exactly as good as it appears.
Buyers who win auctions are, by construction, the most optimistic bidders: the ones who modeled the highest value from the same information everyone else received. Winning an auction selects for the most aggressive assumptions, not superior analysis.
Proprietary deal flow changes this. The buyer who found the owner before a process started can develop a genuine view of the business: visiting the operation, having real conversations with the owner, understanding what the business looks like before any CIM shapes the narrative. That information advantage changes the quality of the diligence starting point.
03. The Entry Multiple Advantage
Transaction data supports the clearest argument for proprietary sourcing: the entry multiple differential.
A buyer who reaches an owner before they have retained an advisor enters a different pricing conversation. There is no competing bid, no structured process creating artificial urgency. The seller knows what they want, and the conversation is about whether the buyer can deliver it on terms that work for both parties.
Bilateral negotiations close at lower multiples than equivalent intermediated processes. Without competing bids, no mechanism drives price to the upper bound. A seller who knows they have one buyer in front of them prices differently than one who has been told three other firms are submitting offers next Tuesday.
For PE buyers, this entry multiple advantage flows directly to fund performance. Entry price is the one variable locked in before any work begins, and it has an outsized influence on realized IRR. Holding period, operational improvements, and market conditions at exit all matter, but they work from a fixed starting point.
Bain & Company's Global Private Equity Report 2024 found that top-quartile funds generate a disproportionate share of returns from entry price discipline, with operational outperformance playing a secondary role. Entry price discipline is only possible when there is no competitive process to bid against.
04. The Time Cost of Building Proprietary Flow
Proprietary sourcing takes time to build and time to produce results.
An auction-sourced deal can be on the firm's desk within weeks of a relationship with a new banker. A proprietary deal requires the firm to have already found the owner, had an initial conversation, maintained the relationship over 6 to 24 months, and been present when the owner's timeline matured.
This lead time is real. Firms closing proprietary deals now started building the sourcing function two years ago. The firms that start building today will have the advantage two years from now. The firms that do not start will still be competing in the same auction pool for the same banker-distributed deals, at the same compressed multiples, in 2028.
05. A Mixed Sourcing Approach
Most M&A buyers should maintain intermediated deal flow alongside a proprietary sourcing channel. Auctions exist. Good businesses go through them. A buyer with a disciplined pricing model and genuine operating value-add can still win auctions at acceptable returns.
The question is portfolio composition: what percentage of the deal pipeline comes from proprietary channels versus intermediated ones. The firms with the strongest long-term performance have built a proprietary channel alongside their banker relationships, one that produces deals those relationships never would.
The proactive sourcing motion supplements the banker network with a channel the auction market cannot reach: the owner who was never going to engage an advisor, the company that was never going to appear in a CIM.
Sources
- GF Data, "Private Equity Middle Market Report" (purchase price multiple comparison across intermediated and bilateral transactions in the lower middle market, published quarterly)
- Bain & Company, Global Private Equity Report 2024 (entry multiple discipline and return attribution analysis by quartile)
- Axia Growth, internal program data (bilateral vs. intermediated pricing outcomes for clients with active proprietary sourcing programs)
- Association for Corporate Growth, middle market deal sourcing practices (channel mix and deal origination across ACG member firms)
We build the proprietary sourcing channel for M&A buyers, from target list to qualified owner conversations. Talk to us about your thesis.