Middle-Market M&A Update

Last month, PW&Co attended a professional conference with over 1,000 middle-market private equity professionals and other capital providers. The story we have heard for the past few years continued – competition to invest capital and close deals has continued to drive up valuation multiples.

Based on the conversations that took place, we identified the following key takeaways:

  • There is a buyer for every type of business.
  • Deal pricing continues to remain elevated for all companies and sizes, although private equity firms remain vigilant of a looming downturn.
  • Acquisitions of companies with less than $3M EBITDA have historically had a lot less competition from private equity groups, but increased competition and elevated deal multiples have pushed these groups to pursue smaller deals.
  • The number of formalized family offices continues to grow in the private equity marketplace.
  • Fundless sponsors are becoming more active in Alabama and provide unique exit opportunities for small owner-operator businesses without a succession plan.

There continues to be an overabundance of private capital looking at too few deals with limited time horizons, and as such, buyers continue to drive up valuation multiples. However, amidst the discussion of all the successful deals done and opportunities, some buyers have grown more concerned about cyclical businesses and have changed focus areas to combat anticipated risks.

Acquisitions of companies with less than $3M EBITDA have historically had a lot less competition from private equity groups, but increased competition in the $5+ million EBITDA range has pushed firms to pursue smaller deals. Some private equity firms have formed “micro cap” funds while others just extend below their stated criteria.

Another important takeaway from the conference is that there is a buyer for every type of owner and business, as long as it is well run. Most want control, but not all aim to operate the business. Most want growing profitable businesses, but some look for distressed businesses. Some of the risks facing small investors in private businesses (customer concentration, key manager risk, distressed financials, etc.) can be diversified away (or at least significantly reduced) by industry strategic investors and larger sophisticated private equity buyers who own (or plan to acquire) other businesses in the industry.

At PW&Co, we help business owners navigate the universe of potential buyers, identifying the right buyer for each company. With the current overabundance of private capital and limited number of quality middle-market businesses for sale, sellers are positioned to have very successful exits in 2019. If you own a business or know of a company that needs advice on how to execute an advantageous sale, we can help.

For more information on how we can assist your company with its merger and acquisition needs, please email Michael Stone or call him at (205) 458-9137.