Company size has an impact on all sorts of considerations when it comes to pursuing a business sale. While the terms ‘lower middle market’ and ‘main street’ are rather commonly used in banking and M&A, these words are probably far less popular amongst most business owners and entrepreneurs. A ‘main street’ business is your typical small business where the owner carries out many (if not most) of the roles that allow the business to function. This type of business is generally valued under the $2M price tag.
A ‘lower middle market’ company on the other hand, is loosely defined as a company with a valuation between $2M and $100M. This type of company generally shares other distinguishing qualities:
- Strong management team in place (apart from the owner)
- Stability and predictability of revenue and profitability
- Low customer concentration
- High level of seller preparedness
- Advanced operating systems
This distinction matters when selling a business, because the process used to sell each size of business is vastly different. Everything from how these types of businesses are sold, for what value, and to whom can vary greatly depending on its size.
Find Your Category
By way of comparison, if a ‘main street’ business is a reliable, family automobile, then a ‘lower middle market’ company is a rare, collector automobile, like a 1963 Corvette Stingray. As such, the collector car buyer is going to want to know every detail about the car’s body, interior, engine, maintenance history, and so on.
If we follow this analogy, you can see that a key differentiator between ‘main street’ and ‘lower middle market’ (as it relates to selling) usually comes down to buyer intent. Along with intent, the buyer pool for ‘lower middle market’ businesses is also much bigger.
While it is still common for high networth individuals to purchase such businesses, they also attract the likes of private equity firms and “strategics” (i.e. other companies, sometimes competitors, that have an interest in expanding their operations through an acquisition). The pool is also larger as these types of buyers span a much larger geographical area and are willing to invest far beyond where they are based.
The reasons for this are relatively straightforward: larger companies are able to better diversify a buyer’s risk, are self sufficient, have access to cheaper capital and though stable, have more avenues for growth.
Business owners need to consider their company’s size as it relates to their ‘go-to-market’ strategy. Your strategy will vary depending on your business’s classification.
Understand the Process
As mentioned above, buyers in the ‘lower middle market’ are, in general, quite sophisticated and will look in depth at all aspects of a prospective company. As the seller, you must be prepared to face such scrutiny. A ‘lower middle market’ company requires a detailed, professionally made “manual” that outlines all granular aspects of the company: industry research, competition, company history, growth potential, financials, as well as other information.
One other dynamic that is commonly overlooked is how deals are sourced by purchasers in the ‘lower middle market’ vs. ‘main street’. Private equity firms pursue large portfolio returns and use acquisitions to buy businesses that yield high returns for their investors. Strategics on the other hand, use acquisitions to buy new products/services and remain competitive within their respective industries.
Because private equity firms seek to generate positive portfolio returns, they look at thousands of opportunities in a given year. Of these thousands of opportunities, they only make a move on a handful of them. So it’s crucial to take a proactive approach and perform a targeted outreach campaign that seizes and sustains their interest to avoid being overlooked.
It is also crucial to take a proactive approach with strategic purchasers as well. In many cases, they are not always actively looking to acquire new businesses, but will jump to buy when the right opportunity presents itself.
All said, in order to garner the greatest number of offers and ultimately sell at the highest selling price, ‘lower middle market’ businesses must take a 360° approach. This means that in addition to using contacts and business-for-sale platforms, one must conduct a thorough analysis of the industry and precisely identify which buyers might have an interest in purchasing the company. Furthermore, one needs to consider what value the company adds to each prospective buyer by way of expanding their sales, allowing them entry to your markets, providing them with your customers, and so on.
To successfully sell a ‘lower middle market’ business, it’s essential to establish aggressive, far-reaching, yet purposeful outreach efforts to influence the highest number of qualified individual buyers, private equity groups, and corporate strategies both domestically and internationally.
Build a Legacy That Matters
Having a team in your corner to help you navigate the grey areas of deal making can prove to be invaluable- from marketing to negotiating to closing.
While Tresle helps thousands of business owners of all sizes sell their businesses, we have a variety of custom offerings tailored to ‘lower middle market’ business owners with revenue ranges $2M to $100M. Our project managers and support teams have extensive experience in many industries. Tresle has a vast range of business and technical skills at your disposal.
Schedule a complimentary, no-obligation consultation with a Tresle team member today. Learn how Tresle can implement and customize your success.