Exit and Growth Strategies for Middle Market Businesses

How Can You Qualify for an M&A Reward?

By Kim Levin | Jan 07, 2014

Baseball GloveIt’s said in baseball that you can be a five tool player.  Throw, run, field, hit and hit with power.  And that gets you a reward… a higher salary.  Well, we have four tool players right now in M&A.  Add-On, Add-On between $25-50 million in revenues, above average performer and management in place… and that gets you a reward… a higher value when you sell.  GF Data began drilling down this data in its quarterly reports back in Q4 of 2012, and the currently quarterly report shows this “four tool” trend is still trending.

You may recall from a previous issue of Middle Market Pulse… add-ons are investments made by Private Equity buyers to add to an existing portfolio holding.  The investor is familiar with the industry and the addition either covers a new product, geography or customer base.  When that add-on sits in the $25 to $50 million sweet spot, investors pay a premium.  Why?  Private equity investors look for a company to fill a gap… not a ravine and not a pin hole, so size matters.  When you have investors seeking a very specific size company, the laws of supply and demand dictate the price. Above average performing companies generally carry a price premium too, regardless of size.   When you then factor in a solid, consistent management team, it’s not hard to see why premiums are paid for companies that feature all four attributes.

So how can you qualify for an M&A reward?  Planning ahead with these four categories in mind is a start.  If your total enterprise value is lower than $25 million, put a game plan in motion to grow it.  If you are planning to retire, think about staying on a while to provide consistent leadership before stepping aside.  Or, make sure you have a strong management team in place that works well in your absence.  A few smart maneuvers now can translate to millions later.

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