Lower middle market is a step up from small business on the value ladder and once there, you are more likely to get offers from people interested in buying your company. Middle market businesses appeal to private equity buyers.
The Q1 2014 Market Pulse survey showed there is strong interest from corporations and private equity to grow through equity. The quarterly survey is done with business brokers across North America by Pepperdine University for the IBBA and M&A Source.
And why would a good middle market business hold more appeal than a good small business? It usually comes down to buyer intent: are they going to be an owner/operator or an owner/investor?
The role of an owner/operator is typical to small business while the role of an owner/investor is associated with the middle market. Here’s why:
An owner/operator is central to the operation of the business; typically they are also the manager. An owner/investor looks for businesses with strong management in place; they don’t want to take over the day-to-day management but instead provide resources to grow the business and achieve the returns they are looking for.
Likewise, a lower middle market business will have systems running the business and a competent team running the systems. In many small businesses, the systems are in the head of the owner.
Most financial statements of small businesses are prepared to minimize the tax burden for the company and its owners. After recasting to normalize the financial statements, a notice to reader will usually suffice. But a lower middle market business needs better financial reporting and assurances in the form of audited statements or at the minimum, a review engagement.
All these are factors that chart the path from small business to lower middle market.
But keeping a company small is a choice for some business owners. They are happiest applying the technical skills that got them there in the first place–the mechanic who started a garage or a baker who opened a bakery. They have no desire to take on additional responsibilities. And for them, value has a different meaning.
Main differences between small businesses and lower middle market businesses
|Small Business||Lower Middle Market|
|Value||Below $2 million||$2 million to $50 million|
|Role||Owner/Operator is central to the operation of the business||Owner/Investor is focused on achieving desired returns|
|Management||Owner is manager||Layers of management|
|Systems||Systems in the head of the owner||Systems are documented|
|Typical form of Financial Review||Notice to reader||Review engagement report or audited statements|
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