Is Your Business an LBO Candidate for Lower Middle Market Private Equity Firms?

Businesses that are looking to expand require more capital injection, completed acquisitions, and strengthened balance sheets to fuel growth. This potential expansion often necessitates outside investment. Working with a lower middle market private equity firm may be a smart move.

The year 2019 saw $450 billion in private equity deals, bringing the total assets held to approximately $3.9 trillion. Half of these deals were worth between $50 million and $1 billion, appealing to lower middle market firms. However, private equity may have caveats attached. Your business will have to pass the stringent due diligence process before being considered for financial backing.

Here are six factors lower middle market private equity firms use to assess potential candidates as part of the acquisition process.

1. Strong Management Team

A good LBO candidate may need to have a solid organizational structure that will carry on the organization strategy for the company. Your team will likely need to have a proven track record, providing strategic guidance during the tough moments. At times, private equity firms in NYC may insist on new management, including CFOs and board members. That said, it’s often easier and more affordable to retain strong managers than to bring in new ones.

2. Competitive Advantage

Lower middle market private equity firms will also analyze your market position. An ideal candidate holds a strong market position with a sustainable business model to sustain growth. These PE firms may look into the barriers of entry to your industry, your value proposition, and customer relationships.

3. Capital Expenditure Requirements

Middle market private equity firms often seek businesses with low capital expenditure requirements. These are companies that can be self-sustainable after one round of investment. Unlike venture capitalists, PE firms prefer low capital injections that provide more flexibility on how the business can allocate capital and run its operations. Capital-intensive enterprises attract lower valuations.

4. Industrial Trends

Private equity firms are always on the lookout for companies that are adapting to emerging industry trends. Being on the positive side of an industry trend result in above-market growth with stronger return potentials for the shareholders. You may need to consider if you hold disruptive technology that would redefine your industry. What are the key performance indicators that you utilize for trend detection?

5. Growth Avenues

Businesses with balanced and diverse growth strategies are ideal candidates for any private equity firm. Your company’s success should not be overly reliant on one revenue driver. A low middle market private equity firm will look to acquire a company with multiple growth avenues such as new product launches, new locations, or revamped customer acquisition strategies.

6. Financial Performance

A middle market private equity firm NYC businesses rely on will have to find options with stable and recurring cash flows. This can allow the firm to manage the high leverage on their investment. A steady cash flow is necessary to ensure that you service the debt requirement. The business may also need to be relatively immune to seasonal and cyclical fluctuations.

Private equity is an excellent way to inject new capital into your business to fuel your growth. You may need to ensure that your business is an ideal LBO candidate before pitching to different PE firms. Praesidian Capital is a New York-based private equity firm focused on the lower middle market and is actively seeking new acquisitions.