Accelerant Says: Get on the Bus or Get Run Over!

In July, our friend Greg Stanley over at Accelerant Consultants wrote a fantastic paper on the competitive changes taking place in lower middle-market business. Though owning and operating a business in this space has never been easy, Greg points out that the past 12 years of economic expansion have made it, at least comparatively, easier. Even given this growth, there is an evolving threat to lower middle-market businesses Accelerant refers to as “the bus.”?

This metaphorical “bus” fundamentally changing the landscape of the lower middle-market is none other than private equity. In the early days with my former company, Granbury Solutions, private equity essentially did not exist in the world of sub-$100m revenue companies.?

What changed?

Greg, however, points to a few things causing this intriguing shift in private equity opportunities. Firstly, there are just more businesses available in the $5m to $100m revenue range (and greater opportunities for growth, too). There are also more private equity firms and funds around today than there were 15 years ago. The most intriguing factor highlighted, though, is the large demographic of older business owners seeking exit opportunities—something we’ll talk about in more detail further down.

A Preqin study cited by Accelerant found that, in 2020, nearly $2.5 trillion worth of dry powder was collectively held by private equity firms. With pressure to start investing this unallocated capital ASAP, there just weren’t enough targets in the $100-500 million revenue range to deploy so much of it. This has inevitably led to firms seeking out profitable lower middle-market businesses and a shift in focus for many private equity firms. It makes sense why, too, as Forbes estimates there are 350,000 American companies with revenues between $5 million and $50 million. With lower multiples, many lower middle-market companies have a far greater opportunity to produce higher returns, too — something increasingly interesting to these firms.

Not only does this new focus open lower middle-market companies to greater opportunity, Greg describes it as a “lifeline” for business owners prepared to exit — we couldn’t agree more.

Now for the bad news…?

Many industries previously untouched by private equity are suddenly being cannibalized by it; business owners are finding their previously stand-alone competitors bought out by major firms. Just this year, Riverside Company was named private equity firm of the year by the Association for Corporate Growth, and their strategy focuses almost entirely on the lower middle-market.?

As Greg puts it: “Because private equity firms build structure, create accountability, improve operational processes and efficiency, develop and execute strategy, and provide an infusion of capital, business owners comfortable competing with other Single A teams are now finding themselves competing with Major League franchises.”?

So, what are your options?

Greg lays out 3 possible courses of action for businesses in affected industries: 1. Level up your business and become competitive with these newly franchise-backed competitors, 2. Elevate your business so as to make it attractive to private equity investors, or 3. Keep up business as usual and “watch the business atrophy and die.”?

In short, the only way to compete in an industry laden with private equity and corporate buyouts is to professionalize your business. This means taking value creation seriously, having a great deal of financial discipline, and building and investing in tools that both improve efficiency and maximize value.?

That can be a lot easier said than done… However, as I spoke about in my M&A blog post just a few weeks ago, those companies with sound operations and effective models are still selling for a premium. Greg put it so well in saying “For those fortunate enough to exit, one of two parties will derive value from the business; 1.) you, as the business owner, running a strategically focused, high growth, profitable, operationally efficient business, or 2.) the private equity firm or strategic buyer taking advantage of the fact that value could be extracted from your business because you didn’t build a well-run business and a platform for growth.”

I’ve said it thousands of times by now, and I’ll say again that only 17% of businesses that begin the exit process will complete it. According to a KeyBank study cited in Greg’s paper, only about 20% of the businesses that desire to exit between now and 2030 will even be market ready. The other 80% will be unsellable in any capacity. Of the 20% that get past the starting line, only 5.6% will receive an offer close to what the owner believes his or her business to be worth. So, while 17% eventually succeed in exiting their business, Greg points out that only about 6% will derive their expected value.

Where to start

Luckily for you, here at Mastery Partners, we specialize in helping you achieve your dream exit. I, myself, have been a part of over 100 business transactions. I’ve made the mistakes, I’ve felt the disappointment, and I’ve learned an awful lot so that you don’t have to worry about falling victim to the process. There are a few things you can do right now to start maximizing your business’s value and preparing for exit:

1. Get my books, Maximize Business Value: Begin with the Exit in Mind, and The Maximize Business Value Playbook: 65 Specific Actions to Dramatically Increase the Value of Your Business. They are a great “lite” version of our TRA — more on that below…
2. Check out our free resources. We have dozens of eBooks, nearly 200 podcasts, and countless blogs all available on our website at no charge. They are a great way to expand your knowledge on specific topics mentioned in the books.
3. Schedule a call with me! I’d love to talk with you whether you believe your business is ready or not. If it is, the first step is to take our Transition Readiness Assessment, which you can learn more about on our website.?