Deal Dynamics in the Lower-Middle-Market: Software, Commercial Services, BPO

Search Party

Businesses acquired in the lower-middle-market at single-digit multiples of EBITDA can be sold for double-digit multiples, but only if the new owners improve operations and grow earnings, according to three veterans of the Entrepreneurship-Through-Acquisition (ETA) search-fund market.

Multiples arbitrage, seller dynamics, buy-and-build opportunities and market mega-trends are attractive features of three industry sub-sectors discussed in this Search Party episode: software, commercial services and business process outsourcing (BPO).

While competition for deals remains fierce in the software lower-middle-market, there are "riches in the niches," says Anthony Walker, a Managing Partner at ETA private equity firm Next Coast Legacy. Walker notes that ETA searchers need to find software businesses that are growing strongly but also profitably. What many investors, and lenders, are looking for is "the perfect mix" of "healthy EBITDA with healthy ARR," says Conor Tidgwell, Senior Vice President at Avidbank, which provides financings to ETA and other lower-middle-market transactions.

The enormous commercial services sector is benefiting from outsourcing trends among lower-middle-market businesses. But many ETA searchers find these businesses - such as HVAC maintenance, landscaping, restoration - to be uninteresting, opening up opportunities for investors who see value, if not glamor. With the right management, commercial services businesses can be vastly improved improved through the application of sales and marketing resources, as well as the use of technology, says Dustin Sellers, a Managing Partner at Next Coast.

Included in the episode is a discussion of the seller dynamics in the three sub-sectors. In the case of BPO and commercial services businesses, the CEOs often are founders who personally provided the services that serve as the companies' core offerings. These founders may not have the skillsets to take their businesses to the next level, and therefore may be open to an outreach from an ETA searcher.

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