Why Are PE Firms Dominating the Lower Middle Market?

In recent years, private equity (PE) firms have significantly increased their investments in the lower middle market, making it a critical area to watch for both buyers and sellers. Understanding the factors driving this trend can provide valuable insights whether you’re preparing to sell your business, exploring acquisition opportunities, or looking to raise capital. This knowledge can help you position your business strategically and anticipate future market shifts.

What is the Lower Middle Market?

Within the American economy, the middle market is a segment of businesses with annual revenues between $10 million and $1 billion. This market makes up under 5% of total U.S. businesses yet is responsible for one-third of the United States GDP, employment with over 50 million workers, and a combined generated revenue of $10 trillion. This sector of the U.S. economy has traditionally been quite resilient, even during uncertain economic periods, which is what drove initial private equity interest in the space.

The lower middle market, in particular, focuses on companies with revenues between $25 million and $100 million. While PE firms have traditionally focused more on the middle and upper middle market, the attention has begun to shift to the lower space.

Primary Reasons for Increased Attention on the LMM from PE Firms

There are various reasons why increased attention on the lower middle market is trending. First, this space is highly fragmented, which means companies can grow organically and rapidly through acquisitions, offering pathways that can result in serious returns for PE firms.

Additionally, these companies are quite flexible and are in far better positions to adapt to innovation in their industries. This value proposition is appealing to many PE firms. Given the finances of many lower middle market companies, they often do not need large amounts of debt. This reduced leverage results in lower valuations during acquisitions, which is ideal for most private equity funds.

All of the above factors result in higher returns than investing at the upper end of the market, where businesses are more mature, or in Main Street businesses, where the opportunities are more limited.

The Strategic Edge: Selling Your Business to Private Equity Firms

Many aspiring new businesses often seek out financing from large banks, but private equity firms can also offer many benefits. The largest of these benefits is the fact that when you partner with a PE firm, you gain access to business mentorship and expertise. This experience can help you take your company to the next level, even if you’re already on the threshold of entering the middle market from the lower middle market, and especially if you’re attempting to make a sale or purchase a business.

When preparing to sell your business and attract the interest of private equity firms, partnering with an accredited business broker can be invaluable. A business broker will help you accurately assess your company’s value, ensuring that you present a compelling case to potential PE firms. Their expertise in navigating the sales process and understanding market trends can significantly enhance your chances of securing the best possible deal. Contact your nearest Sunbelt office to discuss how to effectively position your business for a successful sale.