Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

How an entrepreneur chooses an intermediary to help with a transaction depends on a variety of factors.

There is not a bright line between what makes a middle market financial adviser a business broker or an investment bank.  Those monikers are typically self-selected.

Here are some considerations.

*The lower the transaction value, the more likely that a self-described business broker rather than a self-described investment bank is to tackle your deal.  To be clear, however, there is no line of demarcation and some self-described business brokers effect larger middle market transactions, while some self-described investment banks execute smaller middle market transactions, but this information is a fair guide as a rule of thumb.

Private Equity:  The monicker private equity, as used in the middle market arena, typically refers to private investment funds, managed by very well qualified management teams.  These funds invest in leveraged buyouts (LBOs) and management buyouts (MBOs), providing management teams and other would be acquirers with financial partners to provide the equity capital required to complete a transaction.

You may want to think of private equity funds as late stage venture capital funds, but it should be noted that the name private equity is sometimes applied to the broader industry of private equity and venture capital.   In one transaction we did recently, one fund that invested styled itself as a venture fund and the other styled itself as a private equity fund, suggesting the blurry line between venture capital and private equity. 

Private equity funds  use a variety of other names, including "buyout funds" and "merchant banks."   Some of the most well know funds include Kohlberg, Kravis and Roberts (KKR) and Bain Capital.

Asset Based Lender:  Asset Based Lenders, frequently abbreviated ABL, specialize in making loans to companies that may not be able to qualify for the loans based on their income and cash flow.  In contrast to traditional commercial banks (though many ABLs are affiliated with banks) ABLs focus on assets.

Underwriting criteria of ABLs vary meaningfully, but they will generally lend up to 70 or 80 percent of company's eligible accounts receivable (A/R) and up to 50 percent (at most) of eligible inventory.

Eligible A/R will typically include accounts due from commercial customers with a good payment history; eligible A/R will typically exclude past due accounts and consumer accounts.  Adjustments are typically made for concentration, that is, having more than a threshold percentage of A/R due from a single customer.

Eligible inventory will typically only include finished goods inventory, located in domestic warehouses, excluding obsolete inventory, inventory in transit, work in process inventory and most raw materials.

ABLs are key players in the successful execution of leverage buyouts (LBOs) or management buyouts (MBOs), where the new structure of the company may not give a traditional bank the comfort to lend.