What is a lower middle market company?
Lower middle market is defined nationally as transactions between $10M and $250M in enterprise value.
When is a good time to sell?
CEOs and business owners routinely ask the question, When is the best time for me to sell? Is now a good time or should I wait? Truthfully, many of the folks that address that question (investment bankers, private equity professionals, financing sources) have a vested interest in having companies go to market. So, business owners can be skeptical when reading optimistic projections.
The Mead Consulting Group has advised business owners for years that there are a number of factors to consider when evaluating if it is a good time to sell a business. The most important is to make sure your company is prepared, and to not wait for the "absolute best time" to sell, but to sell when the market is good. There are lots of examples of companies that have regretted not going to market in 2006-2007 because they thought the market for their company would be better in 2009 or 2010, or got caught in the early “Covid squeeze” when the stock market plummeted in March 2020.
There are a number of factors that suggest that 2021 could be a terrific time for some lower middle market company owners to sell.
1. Company results have rebounded or stabilized. Many lower middle market companies have rebounded or at least stabilized from the early Covid downturn. Even if revenue growth in some sectors is still very moderate, many companies have done an excellent job of managing expenses and increasing cash flow. Demand in many industries has rebounded nicely.
2. Valuations are high. With stock market at record levels, the prices (multiples of EBIDA) being paid for good companies are at high levels.
3. Potential Tax Changes. With changes in Washington, there may be an appetite for raising taxes to offset the cost of the Pandemic, and the economic stimulus packages.
4. Interest rates are still historically low. This is important since the buyer of your business need to borrow for the transaction.
5. Private equity firms have plenty of dry powder and fewer distractions from older investments. Private equity firms have raised record amounts of investment capital. With lots of capital to invest, they need to put that capital to work by buying companies. At this time of year, they can focus most of their attention on looking for new opportunities.
6. Private Equity has an increased focus on lower middle market transactions. There are many new private equity firms and family offices that specifically focus on the lower middle market.
7. Strategic buyers have lots of cash. Strategic buyers have been accumulating cash in record amounts.
8. Strategic buyers need to find new ways to grow. Sources of organic (internal) revenue growth have been difficult for many strategics. They are under pressure to acquire companies that add new products, new customers, new geographies, and new capabilities.
9. There are still more buyers than sellers in the market. The number of baby boomer business owners who are reaching retirement age is increasing daily. In 2021 baby boomers range in age from 57-75 years old. There comes a time when these business owners need to sell and there may well be a glut of businesses on the market. Surprisingly, this has not happened yet.
Are you and your company ready to go to market?
Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.
Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.
If you would like to perform an assessment of your company's readiness to maximize value in a sales or recapitalization transaction, contact me today.