The Food Chain of M&A¶
Definition¶
The Food Chain of M&A describes the layered sourcing model in lower middle market deal origination, where each participant in the chain sources most efficiently through the layer closest to the business owner rather than trying to reach business owners directly.
Origin¶
Referenced by Chris Reilly in Ep. 23: Deals Still Run on Relationships when explaining why VRA's origination strategy prioritizes COI/referral relationships over direct outreach.
The Chain¶
PE Firms / Buyers
↓ source through
Investment Banks / Advisors
↓ source through
COIs (Wealth Advisors, Attorneys, Accountants)
↓ have direct relationships with
Business Owners
Each layer adds efficiency:
- PE firms → Bankers: More efficient than going direct because bankers have pre-qualified, advisor-represented businesses ready for institutional capital.
- Bankers → COIs: More efficient than direct outreach because COIs have "entrenched relationships" and one-degree-of-separation access. Higher hit rate, lower volume.
- COIs → Business owners: Already trusted advisors with ongoing relationships — no cold outreach needed.
Why It Matters¶
The implication is that each participant should invest most heavily in the layer immediately below them in the chain:
- PE firms should invest in banker relationships (not just cold-call business owners)
- Bankers should invest in COI relationships (not just do mass direct outreach)
- The further you try to reach down the chain directly, the lower the hit rate and the higher the cost per deal
This doesn't mean skipping layers is impossible — VRA does direct business owner outreach, and PE firms do proprietary sourcing. But the economics favor working through the chain.