Insights

The “Dating Site” for Lower Middle Market M&A Deals
POSTED 5.11.21 M&A

Pre-pandemic, the M&A world was all about hitting the road, with companies meeting potential capital providers or Buyers personally in board rooms all over the country. That’s a lot of airline miles.

But for the last year or so, the majority of business development has been done online. And an innovative online platform that facilitates these sorts of interactions has taken off in a big way.

Axial makes it easier than ever for lower middle market companies looking to raise money or get bought to meet privately with PE firms, VCs, Independent Sponsors, and even Strategic Acquirers.

I liken it to the Match.com of M&A. Companies that are looking to be bought, or are seeking capital, post a profile and what they are looking for. Buyers and investors do the same.

Axial also provides “concierges” who help connect appropriate members on either side who could do business together.

The platform has been widely adopted in the time of Covid. According to Axial, 5,000 companies with EBITDA between $1M and $5M privately marketed their deal on the platform last year.

Lower middle market companies, many of whose founders and management teams are not well-versed in M&A, can also hire advisors through Axial to help them find potential deals and walk them through them.

And here’s the thing: Even as travel resumes and we move towards business as normal in many parts of our lives… don’t expect in-person business development to go back to the old way. Firms have discovered just how much they saved on travel during the pandemic. And how effective the Axial platform is at facilitating relationships between Buyers and Sellers.

Any attachment Acquirers and investors had to conferences and other face-to-face meetings at almost every step of the deal process is fading.

As Mark Gartner of ClearLight Partners put it back in Sept. 2020:

The game of staffing up one or more business development professionals to focus their energies on literally the exact same strategy every other private equity fund is employing is simply dead. The famous investor Sir John Templeton once said, ‘It is impossible to produce superior performance unless you do something different.’ This is sage advice as we usher in business development 3.0 and say farewell to the following activities that are sort of like rocking chairs – they give you something to do but don’t really get you anywhere.”

Gartner cited the following strategies as “dead”:

  • The conference circuit
  • High volume/low value city visits
  • Book collecting

These strategies, of course, still have some sort of place going forward in M&A, but it will be radically different. I think most PE firms will reserve travel for when deals are further along… and make first contact online. And Axial is ideal for this new strategy. They’ve more than proven they can handle these deals and facilitate them quite nicely.

Take this example…

Trinity Consultants is an air quality consulting firm out of Dallas that has made more than 20 acquisitions in the past 12 years. But most of those deals were in the air quality space. They turned to Axial to find deals in new industries and from new sources.

As the company put it in a case study on the Axial website:

“Axial brings deals to us and helps us think about the realm of possibilities that could make sense.” 

Working with Axial, led Trinity to acquire ADVENT Engineering, a life sciences engineering consulting firm. Says the ADVENT CEO of the deal:

“Without Axial, there’s no reason the company or their banker would have heard of us, and no reason we would have heard of them.”

It’s deals like this that make Axial so powerful…and the leader in this space. Over the last 10 years, it’s grown into the largest online platform for buying, selling, and financing private companies.

The Paradox of Choice

Common wisdom is that the lower middle market is underserved… that these small companies are the redheaded stepchildren of the M&A world and all the services are geared towards bigger companies.

Peter Lehrman, founder and CEO of Axial, has a different view. He says the problem is there are too many providers. There are all different types of investors and service providers who are vying to do business with lower middle market companies.

The Buyer’s universe for lower middle market companies includes 4,000 PE firms, tens of thousands of Strategic Acquirers looking to grow inorganically, thousands of family offices looking to invest in something other than the stock market…and even Independent Sponsors, individuals who, backed by private equity, are looking for companies to run and take to the next level.

The problem is, says Lehrman, is that potential acquisitions in this space actually have too many choices, and it’s tough to navigate them and find the right providers and potential acquirers. And that’s precisely why Axial focuses on this space.

As he told me in a recent interview:

“I think the lower middle market has a level of dynamism to it that makes it a market where information problems plague Buyers and Sellers, that make it harder for Buyers and Sellers to find one another, to be found by one another, and to assess one another as counterparties and partners.”

 “There are a lot of problems and challenges that are, I think, much more unique to the lower middle market than to really any other sort of ‘category’ of private capital markets.”

This reminds me of some relatives of mine from Ireland who were visiting recently. They needed aspirin, so I sent them to the chain drug store down the street from my house. They came back empty-handed. Faced with 30+ different varieties of pain relievers they couldn’t make a choice.

Adds Lehrman:

“I don’t think [the lower middle market] is underserved. I just think it’s very, very hard, as a business owner, to know how to sort of assess all of these potential partners to work with. And I think that’s actually the bigger challenge. It’s not that there are not enough people serving the lower middle market.”

 “It’s about helping the owners and entrepreneurs navigate that huge list of choices. They’re looking at say 100 private equity firms, and they’re thinking ‘What am I going to do, go to every single one of their websites? They all sound the same and say the same thing, right? So how am I really going to figure this out?’”

 “So that’s what I think is actually the bigger challenge. It’s not that they’re underserved. It’s that there’s too much choice, and they need help slicing through those choices by getting their hands on good information and good resources.”

The paradox of choice in action.

Potential investors and acquirers of lower middle market companies also face difficulty. These small businesses are scatted around the country… and there are tens of thousands of them owned by private equity. And as some firms grow and enter into the middle market, new entrants come in. It’s a constant churn.

It’s no wonder that a platform like Axial, which uses technology to connect potential partners, has become a go-to for savvy dealmakers.

Next Steps

Of course, no matter how Buyer and Seller came together, there is a unique insurance product, which has become available to lower middle market deals only in recent years, that is a must have for M&A transactions.

Representations and Warranty (R&W) insurance, which transfers indemnity risk to a third party (the insurer), has been…

  • Recognized as advantageous for both Buyers and Sellers
  • Shown to speed up negotiations and eliminate potential bad feelings between the parties on each side of the table
  • Opened up to smaller deal sizes, especially to the lower middle market transactions
  • Reduced in price

I specialize in this type of insurance, and I’d be glad to discuss how it can specifically benefit your deal. Please contact me, Patrick Stroth, at pstroth@rubiconins.com.