In the M&A landscape, founder-owned, lower-middle-market businesses are taking center stage. PitchBook says over 33 million small to medium-sized businesses are founder-owned in the US alone, yet less than 75,000 have external backing.

Historically, these non-backed enterprises have accounted for a large share of M&A deal count, despite a decline from 60.3% in 2007 to 52.6% in 2015, according to recent PitchBook research. However, a recent uptick in deal count occurred in this space in Q1 2023 to 61.5%.

One significant reason for this uptick is that more founder-owners of non-backed businesses are seeking retirement. After years of hard work and dedication, such owners are looking to move into the next phase of their lives. Many buyers are capitalizing on the opportunity to acquire these established enterprises.

Many sellers in this space are more motivated by retirement, and buyer motivations have also shifted. The M&A buyer universe has recently seen a trend of industry giants favoring smaller deals over megadeals – primarily due to market volatility and economic uncertainty. In recent months, PE firms and large buyers are favoring smaller deals, and large corporations are witnessing lower valuations than the middle and lower-middle market, one of the many factors driving them to sit on the sidelines rather than sell. In addition, many large corporations seek to acquire smaller firms to increase revenue.

While many large, sponsor-backed companies are waiting to sell, non-backed, founder-owned businesses have become prime acquisition targets, presenting several unique advantages. Their clean slate, devoid of prior external influence, makes them easier to integrate into new ownership. Additionally, their growth potential is highly attractive to buyers looking to create value and expand their market presence.

Typically, M&A megadeals grab headlines, but the smaller ones are increasingly making waves. Founder-owned businesses are often at the center of these transactions, with deals typically under $100 million. While smaller in scale, these transactions offer distinct growth and value-creation opportunities. The changing economic landscape and the need for smoother transitions are also spurring founder-owners to explore partnerships with skilled investors.

For founders, partnering with the right buyer can mean continued growth, performance incentives, and a legacy upheld. Financial sponsors, in particular, can breathe new life into these businesses, leveraging their expertise and resources to scale operations and improve profitability.

Looking Ahead

The momentum behind acquiring founder-owned businesses shows no signs of slowing down. As conditions evolve and the marketplace shifts, these businesses are poised to continue capturing attention as potential targets.

In a landscape where change is the only constant, the rise of founder-owned businesses as M&A gems is a testament to their resilience, potential, and the unique value they bring to the table.