– Companies with $1m-$5m in EBITDA are generally defined as lower middle market.
– Due to SBA loan limits of $5m, it is difficult for most owner/operators to finance lower middle market sized deals.
– Most private equity funds and corporations only consider acquisitions with at least $5m in EBITDA.
– This makes the lower middle market have many more sellers than qualified buyers.
Unlike the stock market and even eBay for used Pez dispensers, the lower middle market is an illiquid section of the M&A marketplace. With typical transaction sizes exceeding the SBA lending limits of $5m, the pool of potential buyers is limited. Most individuals are unable to assemble enough capital to complete a transaction.
Companies in the lower middle market are usually too small to draw the attention of the numerous private equity investors, many of which won’t consider companies with under $5m in EBITDA.
This leaves a select group of Private Equity Funds, Family Offices, and Search Funders as potential buyers of these companies. Most are looking to grow the business into a middle market size company, and achieve a profitable exit 5-7 years into the future. A few buyers also pursue a buy and hold strategy with the goal of growing the business to terminal size, and collecting distributions from the ongoing cash flow. One reason the lower middle market is a tough sector is because both sustainable, growable businesses, and owner dependent businesses can exist within this range.
To determine if the business being sold can transition to new ownership and continue to grow and prosper into the future is a time consuming process. The buyer will need to undertake extensive due diligence and analysis in order to differentiate the two.
In this frequently overlooked section of the market, buyers spend their time separating the truly successful, sustainable businesses, from the ones that succeeded due to the grit and persistence of a founder who can’t be replaced.
Few tasks waste as much time as an unmotivated seller or a business that is not properly prepared for analysis. With so many opportunities available, this limited pool of professional business buyers won’t wait around as the seller slowly prepares that necessary documents for proper evaluation. Being prepared for market is key for successfully selling a business and an area where an advisor can add significant value.