Lower Mid-Market Deals 101The lower middle market accounts for more than an estimated 90 percent of the total number of all middle market companies in most global economies, so the lack of knowledge on deal structures is a significant succession planning issue.
The appropriate amount of each source of capital is based on the specific circumstances of the deal.
Bank FinancingThe level of bank financing that can be obtained on the purchase/sale of a business is based on two things: Let's take, for example, the purchase of a business with a negotiated purchase price of $10 million. If this company has $8 million in assets, an acquirer will be able to obtain more bank financing than if the business had $5 million in assets. Similarly, if this business has $4 million in EBITDA, the purchaser will be able to get more financing than if there was only $2 million in EBITDA. This is a pretty obvious and straightforward concept.
Vendor FinancingThe right level of vendor financing is not as easy to quantify as bank financing. From my experience, vendor financing on lower middle market deals range from 0% to 30% of the purchase price. This level moves up or down depending on a number transactional risk factors including, but not limited to:
The appropriateness of the amount is based on qualitative characteristics and, of course, is negotiated between the vendor and purchaser. Banking institutions also like to see a certain level of vendor financing in a deal because it ties the selling owner to the business and ensures (to some extent) that they are committed to a successful transition.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist