Today, most entrepreneurs have recognized that growing their company’s EBITDA to at least $3 million opens greater exit opportunities to financial buyers that just don’t exist below that threshold. For many private equity sponsors, a well-run, diversified $3 million+ EBITDA business is big enough to consider acquiring either as a platform or an add-on.
One reason why $3 million+ is big enough today is that we generally see entrepreneurs switching from using business brokers to sell their business to using lower middle market investment bankers. As investment bankers generally have larger networks and more efficient processes, that translates to a more efficient marketplace where more potential buyers (both strategic and financial) will see the company. Getting to $3 million+ in EBITDA gets you on the bottom rung of the all-important lower middle market ladder.
Most importantly, getting to $3 million+ opens up your company to many more financial buyers which can lead to competitive bids and hopefully larger sales multiples. For many years, that meant financial buyers generally consisting of funded private equity only, and specifically funds raising from $50 million to $500 million.
I believe the most dramatic change in the past ten years is that we’ve seen a wave of new independent sponsors.
By definition, an independent sponsor does not have a fund, rather they’re “fundless”. Many thought the “fundless” label would stop independent sponsors from winning many deals. But that just hasn’t been the case. Why not? Surely, it’s the result of many factors but I would contend it’s mostly due to that long-standing truth, incentives drive behavior.
Independent sponsors have truly increased the number of buyers in the room for lower middle market transactions.
Independent sponsors are incented to find a good company and get it under letter-of-intent at a good price, since they don’t have any management fees or carry from a fund.
Oftentimes, we see independent sponsors acting like a sales force for funded sponsors by winning the deal mandate then bringing in the funded sponsor to get the deal closed. Other times, they’ll get funding from wealthy family offices, bring in SBIC mezzanine funds, or pass the hat to family and friends.
Why are independent sponsors winning deals?
Some independent sponsors are targeted industry experts, making them credible with sellers. Some are adept at highlighting who key future investors will likely be, helping them gain that credibility. And frankly, some independent sponsors are just arguably better, more active, focused salespeople.
In short, independent sponsors have truly increased the number of buyers in the room for lower middle market transactions.
If you have any doubts about the impact of independent sponsors, check out the meteoric rise of the McGuireWoods Conference which is held yearly in October. The Dallas-based conference now brings together more than 1,000 independent sponsors from across the country.
About the Author
Joseph Gaffigan is the president of O2 Sponsor Finance and the former president and co-founder of TCF Capital Funding from 2012 to 2021 until TCF Bank was acquired by Huntington National Bank in June 2021. Mr. Gaffigan remained with Huntington as the president of its sponsor finance unit spinning out in January 2022 to join Old Second Bancorp to form O2 Sponsor Finance. Old Second Bancorp has $5.9 billion in assets and is headquartered near Chicago in Aurora, Illinois.
Chicago-headquartered O2 Sponsor Finance is a national provider of cash flow-based loans to lower middle market businesses with $10 million to $100 million in revenue and $2 million to $10 million in EBITDA. Typical investment sizes range from $5 million to $25 million with syndication capabilities up to $60 million. The firm focuses on supporting private equity sponsors, independent sponsors, and family offices in their acquisition or recapitalization of lower middle market companies.
© 2023 Private Equity Professional | June 9, 2023
