In the world of mergers and acquisitions, the middle market is hotter than ever.
Sellers can finally exit their businesses, or take money out, at valuation levels that haven't been seen since before the economic downturn.
Recently, this competitive environment has put businesses on the private equity radar that have been historically overlooked by the bulk of private equity investors.
Money Is No Longer a Differentiator
Why the uptick in valuations? It's partly because businesses are doing better financially and can more easily be convinced of their growth potential, but a much bigger factor is an abundance of private equity money chasing deals, says Bryan Crino of Skyway Capital Partners, a Tampa-based M&A private equity and advisory firm whose principals have been active in lower middle market deals since Skyway's founding in 2003.
Private equity statistics bear this theory out. In 2014, private equity companies raised over $140 billion, ending the year with $535 billion ready to invest. Needless to say, those private equity funds' limited partners will not be happy with their private equity returns if that money sits idle, which is bringing more investor attention to the middle market.
"With an inherent need to put money to work in a more competitive environment, it's not surprising that investors who previously only did large deals are now looking at lower middle market deals" says Crino. "You've got more than half a trillion dollars chasing deals out there. With robust non-bank credit markets providing attractive financing for PE-backed companies, there's an even bigger multiplier effect."
"A private equity firm with $300 million to invest would much rather make ten to fifteen $20-30 million investments than have to do thirty to forty deals in the lower middle market," says Crino and "that does not even consider the fact that smaller companies tend to be more work than larger ones for PE investors to manage and grow. "
Nevertheless, with the amount of money in private equity funds looking to be invested, the lower middle market continues to heat up. You are now even seeing some private equity funds designed to focus exclusively on the lower middle market opportunity.
Lower Middle Market Still Ripe with M&A Opportunity
Skyway Capital operates in the lower end of the middle market, both as an advisor and as an active investor via their captive private equity investment funds.
According to Crino, the lower middle market involves buying out or investing in companies where the equity investments are often less than $10 million. He says that's an area where most private equity firms haven't been willing to go because it requires hands-on operational expertise and simply executing the transactions can be as time-consuming as larger deals.
Crino and his business partner, Scott Feuer, have achieved significant returns in the lower middle market via their captive funds. They have completed twelve acquisitions under their holding companies, Windward Capital Partners and Spinnaker Health. Last month, the Tampa Bay Business Journal reported that Crino and Feuer had recently received "significant investment returns" in the sale of an assisted living center in Texas. That news came just a short time after they had taken over fourteen skilled nursing facilities in Kansas.
The investor pair appear continue to look for lower middle market opportunities in healthcare, staffing, real estate, technology and other attractive sectors that they have experience in.
"It has to be the right opportunity for us to get involved," said Crino. "When a company needs operational expertise and capital, not just capital, that is definitely our sweet spot. If they want, owners can exit the business completely, but we prefer partnering with operators who really want to take things to the next level and are willing to make the changes necessary to do that."
The Message for Small Business Owners
The key takeaway for small business owners is that there are more opportunities than ever before to sell all or part of your business. However, most of these new opportunities involve partnering with private equity funds, which brings an entirely new set of dynamics to your business.
If you enjoyed this article, you can find plenty more like it on our site. We cover important news stories for entrepreneurs. In addition to breaking news for entrepreneurs, we also have tons of how-to articles that cover things like getting business loans, preparing a marketing plan, selling a business and much more.