What is the Lower Middle Market in Mergers and Acquisitions?

While “Lower Middle Market” (LLM) is a phrase commonly used by investment bankers and private equity firms, many business owners may not fully understand its significance or why it matters when they are considering selling their company.

In this post, we will dive deeper into what the lower middle market is and how it may influence your business in the M&A world.

How is the Lower Middle Market (LMM) Defined?

Lower middle market stems from the broader term “middle market” which includes businesses with annual revenue between $10 million and $1 billion. While financial institutions may further define these categories differently, most investors consider companies with annual revenue between $10 million and $150 million to be in the lower middle market.

These businesses are positioned in a unique place in the market as they are larger than the mainstreet businesses (those with annual revenue of $5 million and below) but smaller than those in the upper middle market (businesses with annual revenue of $150 million to $1 billion). While they may not gain attention from bulge bracket banks like Goldman Sachs or JPMorgan Chase—firms that usually focus on multi-billion dollar companies in the large market— they are prime for private equity groups and strategic buyers looking for growth opportunities. 

How Do LLM, and Mainstreet Businesses Compare in M&A?

Many people do not realize how hard it is for a business to grow from a mainstreet business to a lower middle market business. It is at the lower middle market where the business increases in complexity.

Structure and Management Teams

Lower middle market businesses have a more complex structure compared to main street businesses. While many mainstreet businesses are often run directly by their owners, lower middle market companies usually have dedicated management teams in place. This difference highlights how each type of business operates on different scales and may attract significantly different types of buyers.

In lower middle market firms, you’ll find a more organized hierarchy and specialized teams that help with strategic decision-making. These businesses often benefit from professional management, which allows them to grow and adapt more easily. On the other hand, main street businesses typically have a less complex setup, where the owner is deeply involved in the day-to-day operations and makes most of the decisions.

EBITDA vs. Seller Discretionary Earnings

In the realm of mergers and acquisitions, lower middle market businesses and mainstreet businesses are priced very differently. Lower middle market businesses are priced using the adjusted EBITDA metric. Adjusted EBITDA is earnings before interest, taxes, depreciation, and amortization with one time or unusual expenses added back.

Mainstreet businesses use a different metric called Seller's Discretionary Earnings (SDE) for valuation. SDE represents the total financial benefit that a single owner-operator would derive from the business on an annual basis. Both Adjusted EBITDA and SDE serve to normalize a company's cash flow allowing for more meaningful comparisons and accurate valuations. Regardless of Mainstreet or LMM, an acquisition transaction target has to have enough consistent cash flow to pay all regular expenses, service the acquisition debt installments, and have enough cushion for a rainy day.

Go to Market With or Without Price

Mainstreet businesses traditionally rely on going to market with a fixed price to streamline the process, while lower middle market businesses require a more nuanced approach when going to market. True North M&A’s proprietary QuietAuction Process™ allows the market to naturally determine the value without disclosing a price. By leveraging bidding and negotiations with the QuietAuction Process™, we can let the market establish value and the competition drives up the price during negotiations.

Why We Use a QuietAction™ Approach

Rather than going public with the sale announcement, our unique marketing process allows us to:

• Maintain confidentiality throughout the process
• By not naming a price, we do not tell the buyer what not to pay for the company.
• Create competitive tension between buyers between IOI’s and LOI’s
• Leverage multiple process points to negotiate not just the highest price, but the most seller friendly terms, netting the business owner the most amount of cash after taxes and fees are settled.
• Protect relationships with employees, vendors, and customers that were built
• Minimize disruption to our client’s business during post-merger integration.

If you would like to see our QuietAction™ process in action, please browse our case studies. They demonstrate our successful track record and illustrate how we’ve helped businesses like yours maximize value.

Learn More About Our QuietAction™ Process

If you are interested in learning more about how our QuietAuction™ might work for you, we would be happy to discuss your specific situation and explore your options together. Contact Michael Hubsmith, President of True North Mergers & Acquisitions, for more information.