Maybe the Best of Times for LMM Company Sellers?

Against the backdrop of economic and geopolitical turmoil and a slow-down in capital raising and M&A activity, it should not be surprising that lower-middle-market (LLM) deals have taken center stage for buyers. And the reasons for that make the current environment an excitingly unique opportunity for best-in-class LMM businesses to achieve out-sized fundraising or exit valuations. Here’s why.

1. Strategic and Financial Buyer Mandates.

Corporate strategic buyers will continue to strengthen their core businesses with innovative acquisitions (IT, AI, supply chain and other business model enhancers, as well as also cost-enhancing vertical and revenue-enhancing geographic market plays) as they spin off non-core divisions. They’re about buying versus building.

Private equity funds (including their family office counterparts) will become hungrier than ever for businesses that require little or no debt to buy and, if the business is an “add-on” within their current portfolio, are clean and prepared enough to easily integrate with their existing platform.

2. Valuation is Relative and Negotiable.

Even as business valuations decline statistically, good companies can achieve high valuations when the supply of sellable businesses decreases and by differentiating themselves to justify a higher multiple. Seller notes, earn outs and equity rollovers, if carefully structured, are icing on the cake assuming the seller’s closing cash reflects a fair EBITDA multiple. Retaining some equity and selling that later can dramatically increase the seller’s upside while allowing them to take some chips off the table now. And the concept of present value, particularly in periods of rising inflation and taxes, can make waiting for a better economy and a higher price a bad decision in the end.

3. Make a Seller’s Deal in a Buyer’s Market.

Like economic headwinds, valuation trends and deal trends, whether a market is ripe for sellers is not as relevant to a best-in-class business that offers value well beyond its current bottom line and is ready to partner or exit. Market cycles repeat themselves, but every seller, buyer and deal is different. While economic challenges and buyer conservatism might portend a buyer’s market, the opposite might be true. While public markets and mega deals struggle, strategic and financial buyers will be anxious to find LMM businesses to buy, and often at a premium.

To capitalize on both strategic and financial buyer mandates, LMM CEOs should lead the charge to mitigate their companies’ perceived risk, enhance their companies’ perceived value (specifically, their valuation “multiple”), and promote their companies’ integration ease.

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