Value Creation Shines in the Lower Middle Market

In today’s private equity landscape, a major shift is occurring. Gone are the days when returns were primarily driven by market multiple expansion and leverage. With rising financing costs, shrinking multiples, and fewer exit opportunities, the focus has now shifted to fundamental value creation. This is especially evident in the U.S. lower middle market, where value creation through revenue growth and margin expansion is now paramount.

The Power of the U.S. Middle Market

The U.S. middle market, comprising approximately 200,000 companies with annual revenues between $10 million and $1 billion, is a critical engine of the U.S. economy. Representing one-third of private sector GDP and employing over 48 million Americans, the middle market is thriving. In fact, 2023 saw 83% of middle market firms report year-over-year revenue growth, highlighting their post-pandemic resilience.

Why the Lower Middle Market is a Strategic Focus

While much capital has flowed into large-cap private equity funds, the lower middle market has consistently demonstrated superior performance. In fact, upper-quartile U.S. mid-market buyout funds have outperformed large-cap funds by over 500 basis points annually. However, the lower middle market offers significant advantages, including:

• Lower pricing: Purchase price multiples are typically 34% lower than those for large-cap transactions.
• Less reliance on leverage: Mid-market deals use 32% less leverage compared to large-cap transactions, making them more attractive in today’s higher interest rate environment.
• More paths to value creation: General Partners (GPs) are increasingly focused on driving value through operational improvements such as growing revenues, revitalizing management, and increasing margins.

Resilience Amid Market Pressures

The private equity buyout landscape faced a challenging year in 2023, with total deal value down -32.7%. Yet, mid-market transactions fared better, declining by only -18.9%, and even showed signs of recovery by year’s end. In Q4 2023, mid-market deal value and count increased by 10.0% and 8.4% respectively, a stark contrast to the broader buyout market’s continued decline.

Multiple Paths to Exit

Lower middle market companies also benefit from greater exit options. While large-cap exits often depend on IPOs, lower middle market companies have more flexible exit strategies, including sales to larger private equity sponsors or strategic corporate buyers. From 2018 to 2022, 97% of mid-market exits were achieved through M&A activity, providing consistent exit opportunities even in fluctuating market conditions.

DOVE Advisor: Your Premier Sell-Side Service Provider

DOVE Advisor was founded with the mission to empower business owners and management teams to maximize the value of their enterprises. Our seasoned team of executives offers extensive experience across various facets of business management, and we specialize in sell-side advisory services for lower middle market companies.

Why DOVE Advisor?

At DOVE, we offer a Value-Driven Approach? to liquidity, ensuring that we extract the maximum value from each transaction. Here’s why DOVE is the premier provider of sell-side services:

1. Strategic Insight and Execution Our team develops and implements tailored strategies designed to optimize value throughout the entire transaction process. From identifying potential buyers to guiding our clients through negotiations and closing, we ensure a seamless experience.
2. Expansive Network We leverage a vast network of over 75,000 strategic and financial buyers and maintain relationships with decision-makers across multiple industries. Our business development team consists of over 100+ consultants, enabling us to reach beyond our internal network to identify the most fitting buyers for your business.
3. Managing the Entire Process DOVE Advisor removes the disruption from your daily operations by managing the transaction process from start to finish. Our team conducts in-depth assessments, prepares marketing materials, handles NDAs, facilitates meetings with potential buyers, and negotiates the best deal on your behalf.

Our Proven Process

• Initial Engagement: We start by getting to know you and your business, building a thorough understanding of your culture, financial performance, and strategic goals.
• Targeted Buyer List: With this understanding, we develop a comprehensive list of buyers who align with your vision.
• Outreach and Negotiations: Our extensive business development team reaches out to potential buyers, facilitating initial meetings and managing negotiations to secure the most attractive offers.
• Due Diligence and Closing: Throughout due diligence, we work closely with your team to address any issues and ensure a smooth path to closing.

Tailored Solutions for Every Industry

At DOVE, we understand that each business is unique, and we specialize in providing customized advisory services across a wide range of industries, including:

• Industrial & Manufacturing
• Distribution & B2B
• Oil & Gas
• Technology
• Consumer Goods
• Medical Devices
• Chemicals
• Food and Beverage

DOVE Advisor: Your Partner for Value-Driven Transactions

Whether you're thinking about an exit or planning a strategic acquisition, DOVE Advisor is committed to helping you achieve your goals. With a team of 45+ former CEOs now serving as Managing Directors, we bring firsthand experience and expertise to every engagement, ensuring that our clients receive the highest level of support and guidance throughout the transaction process.

Bottom Line: As the lower middle market continues to offer superior value creation opportunities, DOVE Advisor stands as a trusted partner for sell-side advisory. With our deep industry knowledge, expansive network, and proven transaction process, we are well-equipped to help business owners maximize the value of their enterprises. Reach out today to explore how DOVE Advisor can guide you through a successful exit or acquisition.

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