Value Creation in the Lower Middle Market
As a business owner considering selling or securing investment, understanding how private equity (PE) firms think—particularly in today’s evolving economic landscape—can be a game-changer. Private equity strategies are shifting, and this is especially relevant for businesses in the lower middle market, typically defined as companies with revenues between $10M-$1B.
The Shift in Private Equity Value Creation
Historically, private equity has relied heavily on leverage and market expansion to generate returns. However, with elevated interest rates and declining market multiples, those tactics are becoming less effective. In response, PE managers are now focused on more fundamental drivers of value creation: revenue growth and margin expansion.
This shift means that private equity is increasingly looking to acquire companies where operational improvements can make a real impact. This is where your business becomes particularly attractive if you’ve built a solid foundation but are looking for a partner to help accelerate growth or optimize margins.
Why the Lower Middle Market Is Attractive to PE Firms
The lower middle market is uniquely positioned to thrive in this new PE landscape. Here’s why:
Lower pricing and less leverage: Mid-market transactions are generally priced 34% lower and use 32% less leverage than larger deals (>$1B EV). This is critical in today’s high-interest-rate environment, as excessive leverage increases risk for both the buyer and seller.
Operational focus: Mid-market private equity managers are skilled at driving value through hands-on operational improvements. A study by Preqin found that revenue growth contributed 1.54x to value creation for middle-market transactions, significantly outperforming large-cap deals, where revenue growth only contributed 0.80x to value creation.
Greater exit flexibility: Businesses in the lower middle market benefit from a broader range of exit options. Most mid-market companies are sold to larger private equity sponsors or strategic corporate buyers, offering greater control over the timing and structure of a sale.
What This Means for Business Owners
If you’re considering selling your company or bringing in a growth partner, now is a great time to take advantage of these trends. Here are a few takeaways:
Understand Your Value Beyond the Balance Sheet: With private equity’s focus shifting to operational improvements, your company’s potential for growth and efficiency gains is as important as its financials.
Expect a Hands-On Approach: Unlike mega-deals in the large-cap space, where the focus may be on financial engineering, lower middle market deals are all about rolling up sleeves and improving the business from the ground up. Expect your PE partner to be deeply involved in operational improvements, management strategies, and long-term growth planning.
The Path Forward
If you’re a founder or owner considering your next steps, now is the time to explore how private equity’s shift toward value creation can work to your advantage. The key is selecting an experienced and aligned partner who understands the unique dynamics of the lower middle market and has the expertise to help your business thrive.
At V&R Advisory & Capital, we specialize in helping business owners like you navigate this complex process, ensuring you not only realize the financial rewards but also find the right partner to continue your legacy. Let us help you take that next step with confidence.
