Private Equity Firms Opt for Smaller Transactions, Benefiting Business Owners in the Lower Middle Market

A notable shift is occurring in private equity as industry giants are now starting to favor smaller deals over megadeals. This change in strategy, driven by volatile markets and lengthy periods of economic uncertainty, carries significant advantages for business owners in the lower middle market.

According to a recent article on the topic from the Wall Street Journal, “The average value of private-equity deals so far this year sits at $65.9 million, or the lowest it’s been since the start of the 2008 financial crisis.” The article also pointed out that higher-priced buyouts private equity firms used to gravitate toward are more challenging. Larger deals mean higher borrowing costs and a lot of these firms don’t want to take a risk on a company with a potentially bloated valuation.

With economic uncertainty at an all-time high and interest rates affecting valuations, the market values of large companies are starting to look more uncertain than ever. This uncertainty is part of what’s pushing “buyout giants” like Blackstone to use their record cash stashes on much smaller deals than they would have considered in the past.

The Journal also noted: “Private equity firms have $1.4 trillion worth of dry powder (investor cash awaiting allocation) to spend on deals. The overall value of PE-backed deals has dipped more than 50% in 2023 to a three-year low of about $256.7 billion, per Refinitiv data.” 

According to industry insiders, smaller takeovers and add-on deals are becoming more attractive to PE firms because they typically don’t require much debt. Smaller deals or add-ons also enable firms to continue investing (even in challenging circumstances).

The current preference among PE firms for smaller deals presents a unique opportunity for business owners in the lower middle market to seriously consider an exit strategy.

With industry giants shifting their focus to bite-size deals, lower-middle-market businesses are now in the spotlight, attracting increased attention from investors. This heightened interest could help business owners exit with potentially more favorable valuations, transaction prices, and deal terms. In addition, the ability to pursue add-on deals, (in which a buyer integrates the business into their existing portfolio), can provide growth opportunities that were previously hard to come by.

In taking advantage of this trend, lower middle market business owners can position themselves to capitalize on the current market dynamics and potentially achieve a successful exit that maximizes value for their businesses, setting themselves up for their golden years.

To properly navigate the complex process of selling a business and maximize value, it is crucial to seek guidance from experienced professionals. If you’re a business owner in the lower middle market looking to unlock the full potential of your business exit, contact ACT Capital Advisors today.   

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