Mid-Market Opportunities: Where Should You Look?

It feels like the world is changing every day and it is difficult to predict how the economy to evolve. But we believe, as do others, that there are still opportunities to be found. Specifically, opportunities to buy within the mid-market essential product manufacturing space.

What is essential product manufacturing?

Our government has deemed certain manufactured goods as “essential”, including

– Chemicals

– Medical equipment/instruments

– Pharmaceuticals

– Sanitary products

– Telecommunications

– Microelectronics/semi-conductor

– Agriculture/farms

– Household paper products

As we’ve mentioned before, the demand for these products is high and many facilities are working hard to keep up while also protecting their own workers. We do not expect demand to lower anytime soon.

Where do the opportunities lie?

Our team is specifically choosing to work with essential businesses that have strong balance sheets and are looking to make acquisitions. They are looking to take advantage of the dislocation in the market. In these times of market dislocation, acquirers are able to structure transactions in ways that allow them to mitigate near-term risks while positioning for long-term growth.

It is also important to remember that even as businesses try to conserve cash against uncertainty, they may still have classic reasons to acquire, such as gaining competitive advantages, increasing market share, or influencing supply chains (particularly critical right now). Experts at McKinsey name six types of successful acquisitions and they are all in play to varying degrees, even in our currently uncertain situation: 

1. Improving the performance of the target company

2. Removing excess capacity from an industry

3. Creating market access for products

4. Acquiring skills or technologies more quickly or at lower cost than they could be built in-house

5. Exploiting a business’s industry-specific scalability

6. Picking winners early and helping them develop their businesses

Why is now a good time to think about this?

Because the middle market is in a unique position at the moment. Other than some opportunistic minority deals, large-market private equity is mostly sitting tight right now, but lower middle-market activity remains somewhat active.

“Lower middle-market deals are driven as much, if not more, by personal reasons than by financial ones,” explained Axial CEO Peter Lehrman. “Death, disease, divorce, retirement. … It’s not always about maximizing for price, which is what usually catalyzes larger deals.”

Now is also a time of increased security for both parties. Sellers are able to take chips off the table, while gaining support from a larger organization to help weather the current storm. The benefit for buyers comes in the form of deal structure. While we are not seeing significant decreases in overall valuations for “essential” businesses, we are seeing changes in structure. More transactions are including seller notes and earn-out provisions to help mitigate some of the risk for buyers, while still allowing sellers to achieve their desired net proceeds. 

If you are considering a sale or looking to grow through an acquisition, contact us for a confidential discussion around your specific situation.

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