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.

Leveraged Buyout:  A leveraged buyout (LBO) refers to the purchase of a business using debt (often referred to as leverage).  The notion of leverage as debt comes from the buying power the debt gives a relatively small amount of equity. 

You may find this Investopedia definition interesting, but I would caution that I have rarely seen deals with as little as 10% equity, as its definition suggests.

In the middle market arena, deals typically utilize something more in the range of 20 to 30% equity.  

A leveraged buyout typically includes several tranches of capital, including most of the following: senior debt, junior secured debt, mezzanine debt, seller financing or earnout, and the equity contribution.

During 2005 and leading into this year, we've seen valuation multiples in M&A transactions increase, especially in transactions by financial sponsors like private equity groups. 

Hedge funds have increasingly become involved in making full on acquisitions, especially in the large cap end of the market.  This may be having an impact on valuations as this brings billions of dollars into the buyout market.

Over time, this is likely to have an impact on valuations down market from the large cap arena.  This will be especially true of hedge funds begin to allocate funds to transactions in the upper end of the middle market.

Watch and see!