The Lower-Middle Market: What Is It—and Why You Should Care?
If you are an owner of a business with annual gross revenue in the range of $10 million up to $200 million, guess what: your business falls squarely into the lower-middle market for Mergers and Acquisitions (M&A).
Whether you’re a sole owner, partner, investor, or family stakeholder, you may be surprised to learn that this segment of the M&A market is akin to Goldilocks and the Little Wee Bear—not too big and not too small.
No matter if you’re considering a sale or merger today or planning for your future, understanding the dynamics of the lower-middle market can be key to maximizing your options.
Keep in mind, these revenue brackets are not set in stone. Some M&A experts will argue that the lower-middle market begins at $5 million and ends at $50 million. As for the upper middle market, some contend that the lower boundary for that segment starts at $500 million and extends to $1 billion in revenue.
We won’t dwell too much on the numbers. Still, it’s crucial to understand the tiers of the general landscape and why lower-middle market deals are described as “not too big and not too small.”
SDE, EBITDA, and EBIT: Oh My!
First off, a company with annual sales under $10 million down to a business generating under $1 million will typically work with a Business Broker. These are often referred to as “Main Street” businesses. They can still be very lucrative for owners who sell, but the deals are simpler, often strictly regional in nature, and many times can be an “all-cash-at-closing” deal.
There may be no real estate involved, and Main Street businesses are often sold for a certain industry-recognized “multiple,” which could be a multiple of annual sales or the seller’s discretionary income (SDE). For instance, if the owner is paying themselves $350,000 per year to manage a $2 million-a-year business, a buyer may be able to see much of that as profit under new management, making it a perfectly fine multiple to guide brokers in valuing a particular enterprise.
For lower-middle market transactions, the key metric is EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA represents a more detailed view of cash profit by excluding certain expenses and adding back non-cash expenses such as depreciation and amortization.
Multiples of EBITDA still come into play but are more nuanced and can be heavily impacted by market conditions, interest rates, industry trends, and more.
While EBITDA (and its variants such as EBITA and EBIT) are not metrics under GAAP (generally accepted accounting principles), they are still widely used valuation methods beyond Main Street.
While Business Brokers are often very knowledgeable about local markets and various types of businesses (restaurants, retail shops, dry cleaners, bakeries, and more), M&A specialists in the lower-middle market often have more resources to help owners in this bracket maximize either an outright sale of a company or work with ambitious owners (and investors) interested in acquiring similar firms as part of their overall growth strategy.
M&A professionals often have a much wider network of buyers—and investors like Private Equity (PE) dealmakers—who are on the hunt to accelerate growth for a buyer. These M&A firms have a deeper bench of experts who can examine existing operations, add value in creating synergies between buyer and seller, and handle more complex deal structures and negotiations.
And, don’t forget confidentiality management. Lower-middle market dealmakers are very experienced in managing the sensitive nature of these transactions. Brokering a business is not too far off from the work of a real estate broker. The process of brokering a business can mean listing a business in local media, lead generation programs, talking to local bankers, etc.
In contrast, working with a lower-middle market M&A advisor usually starts with preparation of a CIM, a Confidential Information Memorandum, and creating what is called a Data Room, where key documents are under restricted access, digital rights are managed, and detailed auditing is part of the due diligence process.
Success in the Lower-Middle Market
In the dynamic landscape of M&A, understanding the lower-middle market is a crucial step towards success whether in an exit or a merger. As you navigate the complexities of selling a business or acquiring another, consider the need for specialized expertise.
Align Business Advisory Services stands ready to be your go-to resource for Lower-Middle Market M&A, offering a customized approach that aligns with the unique characteristics of your business. Whether it’s about making informed decisions today or preparing for future opportunities, AlignBA is your trusted partner in achieving your M&A goals.
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