M&A Market Remains Strong for Quality Targets

By Generational Equity


PitchBook is a leading research organization that tracks merger and acquisition trends, focusing largely on the key segment of the industry where the vast majority of deals are sized, the lower middle-market (deals valued below $500 million are generally defined as being in the middle-market, those below $100 million are usually lower middle-market).

Based on their analysis, this latter segment of the M&A market still remains a “seller’s market,” especially for well run, profitable, growing companies. This is how PitchBook describes the situation in a recent article:

It's clear that continued competition for deals and sustained high prices for quality companies is helping elevate transaction multiples and, consequently, overall deal value even at the lowest ends of the middle market…

The lower reaches of the middle market are quite popular nowadays. Since private equity buyout shops are sourcing so widely, and, moreover, are still firmly staying away from the mega-buyouts of old, it’s more likely than not that a shrunken supply of worthwhile targets is contributing to the slowing of the buyout cycle. The question then is how much the buyout cycle may slow by, and how long that will take.

As long as the cost of borrowing remains low and PE capital overhang so bulky, it really does come down to a matter of supply. Accordingly, the slowing of the cycle still has some ways to go, as a fair degree of consolidation among small-to-medium businesses in certain sectors, either due to generational wealth transfers or industry cycles, is still ongoing—generating opportunities for financial sponsors—in which the quality of the company in question becomes the primary obstacle.

According to Pitchbook, the demand for quality lower middle-market companies remains robust and should continue to be so for quite some time. Now the key to this analysis is the word “quality.” As with the definition of beauty, you know it when you see it. But generally speaking, a quality company usually has many of the following characteristics:

  • Minimal owner dependency
  • Lack of customer concentration (no single client provides 20% of revenue)
  • A recurring revenue stream
  • Solid base of experienced key employees

If you have these features in your business, then it may command a premium value in today’s market, because what buyers tell us regularly is the one thing they lack in today’s market is a base of well-run companies to target:

The common theme we hear from buyers is this: We have plenty of capital to invest, what we lack is time to spend reviewing too many targets that are not relevant to our needs as platform or add-on companies. If you have one (or more) of the features listed above, it would behoove you to re-examine the timing of your exit plans.

Currently we are in the midst of a seller’s market in the lower middle segment. Fortunately, post-election, it is clear that changes are coming that may positively impact the financial markets. The results of November 8 caught many M&A professionals by surprise and it is now clear that the business environment going forward will be positive as it relates to M&A activity. 

If you are considering an exit in the next 18-24 months, I recommend that you reach out to an M&A advisor to guide you through the pending few months. If you have not spoken to an M&A professional, the Generational Group is here to help. Our firm is comprised of the leading M&A professionals in the lower middle-market. In fact, no company has closed more deals in this niche than we have over the past several years, according to Thomson Reuters, a research organization that tracks deal closings.

For more information about our services and how you may benefit from them, call me at 972-232-1125 or send me an email at cdoerksen@generational.com. For additional information about our services, use the following links:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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