A Comprehensive Guide to Acquiring Lower Middle Market Companies through Private Equity Financing.  

Written by:  The PE Guru – Gerald Moran O’Dwyer, III – Blackmore Partners, Inc.

Introduction: 

When navigating the private equity (PE) landscape, understanding the nuances of the deal process is crucial. The lower middle market, with its rich tapestry of growing companies that have the potential to generate significant returns, is a space where the well-informed executive can thrive. This article provides a detailed roadmap for executives looking to buy companies with revenues in the $20 million to $100 million range, using private equity financing.  

 I.Spotting the Ideal Acquisition: Key Characteristics 

The perfect target is seldom an abstraction. Here are a few aspects that make a company a good buy:  

• Fragmented Space: A fragmented industry is one with numerous smaller players and no dominant entity. Companies in such sectors have excellent growth and consolidation potential. Leveraging industry knowledge and economies of scale, one can successfully consolidate multiple small firms into a larger, more competitive entity.  
• Add-ons: Add-on acquisitions can enhance the parent company’s strategic positioning and drive growth. A company that can easily integrate with or supplement existing operations can provide opportunities for cost reductions, market expansion, and other synergies. The future potential for add-ons should be a crucial consideration in your acquisition strategy.  

II.Engaging with Sellers: The Right Questions 

As an executive, you must be prepared to ask insightful questions to the sellers. Here are some examples:  

• Financial Performance: Inquire about revenue trends, profitability, capital expenditures, and the drivers of these figures.  
• Customers and Markets: Understand the customer base, the company’s market position, and growth prospects.  
• Operations: Delve into the company’s processes, supply chain, management structure, and employee culture.  

III. Sourcing Deals: Building a Network  

To find owners willing to sell, you need to build and leverage a network. This process involves researching, attending industry events, networking with PE firms, and possibly utilizing services such as www.blackmoreconnects.com. This platform provides PE conferences that offer networking opportunities and coaching from PE firms on connecting with owners and securing financing.

IV. Private Equity Firms: The Importance of Pre-existing Interest 

Knowing in advance 100-200 PE firms already interested in the sector can streamline your acquisition process. It ensures you’re targeting the right audience when raising funds and bolsters the credibility of your pitch. 

V.The Value Creation Plan: A Must-Have Now, Not Later 

A value creation plan outlines how the company will increase its worth post-acquisition. It can include strategies for revenue growth, cost reduction, capital efficiency, and talent management. Having this plan in place prior to the acquisition demonstrates foresight and gives potential investors a clear vision of the company’s future. 

VI. Deal Economics: Understanding Executive Compensation in PE Deals 

In private equity deals, executives are often incentivized with a mix of salary, bonuses, and equity. The details are:  

• Salary: An executive’s salary may be tied to revenue growth, incentivizing the executive to drive the top line.  
• EBITDA Improvement Bonuses: These bonuses reward executives for improving earnings. They can either be taken off the table or reinvested in more equity.  
• Equity Stake: Executives often receive a minimum of 5% equity, providing a direct incentive to increase the company’s value. This equity stake can grow over time due to the effects of leverage and multiple expansion upon sale.  

Private equity deals offer a unique opportunity for executives to actively participate in the growth and eventual profitability of a company. To successfully navigate this landscape, thorough preparation, networking, and a clear value creation strategy are imperative. By following the guide outlined above, you can effectively identify, acquire, and grow lower middle market companies.