Making the Case for Lower-Middle Market M&A

Making the Case for Lower-Middle Market M&A

Mergers and acquisitions

When thinking about Mergers and Acquisitions (“M&A”) in the traditional sense, one might imagine large, multinational companies combining due to lack-luster organic growth opportunities or to increase economies of scale. While this may often be the case for the largest of companies, the motivation for M&A in the lower middle market is often much different. Though certainly not all-inclusive, the list below provides some valid reasons why a business in the lower-middle market may seek out M&A opportunities:

 

  • Customer Concentration: Many middle market companies derive a large share of annual sales from a handful of key customers. This customer dependence can arise from a number of factors such as the specialized nature of a company’s products and services or limited outbound sales efforts.  Acquiring or merging with another company in the same market can diversify revenues for both companies while pooling resources such as sales staff and facilities.

 

  • Geographic Footprint: For companies operating in a specific state or region, the risk of being over-exposed to one or two industries can make for an overly-cyclical operating environment. Seeking out an acquisition of, or merger with, a company in the same line of business in a different region can help to diversify both companies away from the markets they were overly-dependent on.

 

  • Professionalized Business Processes: Many lower middle market companies lack the resources or capabilities to invest in, and manage professional enterprise software systems. The pooling of human and financial capital associated with a merger or acquisition can create opportunities for professionalization of the combined businesses.  The ability to invest in these kinds of improvements increases the control and stability of the business and creates value for its’ stakeholders.

 

Mergers and acquisitions are sometimes viewed as a tool for decreasing competition, thereby increasing profitability within a given market. In the lower-middle market; however, the motivation behind M&A usually comes from the desire to create a better managed business with a more stable operating environment.

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