Matthew Brunstrum Explains How Different Types of Buyers View Deals when Acquiring Lower Middle Market Businesses
By: Matthew Brunstrum
Tags: Deal, Business, Business Development, Selling, Business Strategy

Matthew Brunstrum Explains How Different Types of Buyers View Deals when Acquiring Lower Middle Market Businesses Matthew Brunstrum Apr 6, 2020·3 min read

When it comes to the type of buyers that will consider acquiring a lower middle market business, they’re not all made the same.

Matthew Brunstrum is an advisor with Sun Acquisitions & MCB Advisory LLC, and he has worked with many business owners and all types of buyers to close deals. He knows that buyers have different reasons and different approaches to buying an existing business.

Private Equity Firms

These private equity firms are primarily looking to maximize value for their investors by acquiring a business, making changes, and selling that same business in 3–7 years, says Matthew Brunstrum. There are typically two ways that these types of firms will fund their investments, with the most common being a leveraged buyout).

This leveraged transaction is primarily financed through bank debt, using the assets of the acquired business as collateral. This means that the cash portion up front that comes directly from the Private Equity Fund is relatively small compared to some other types of deals.

The private equity firms will then look for operational efficiencies to increase the performance of the business to maximize returns. That may or may not involve keeping the current owner of the business on board to help guide this process, while potentially divesting some staff and assets not deemed necessary by the firm, says Matt Brunstrum.

Generally, a private equity firm does not buy a business with the intention to keep it over the long-term. The goal is to increase the value of the business over a period of 3 to 7 years and then sell it for more to satisfy the fund investors.

Matthew Brunstrum on Strategic Buyers

These types of buyers are already company owners in the same or complementary industry and are looking to make the acquisition fit into their existing operations, explains Matthew Brunstrum. Not only do they see potential growth in the business they are buying, but sometimes, part of the strategy is to eliminate a competitor, he adds.

Other reasons that a strategic company will buy a business is to acquire different revenue streams or even take on an established high-volume customer. They will typically streamline the operations so they can pull more profit from it than under the current model by using economies of scale. A strategic company may pay more for a business than other types of buyers as they plan to integrate it into existing operations and generate long-term returns for shareholders.

Family Offices

There’s a growing trend of wealthy parties buying businesses through their family offices, which are generally regarded as private financial advisory firms that manage acquisitions and other financial actions for a single client.

Because the family office looks out for the interests of only one (or a few entities in some cases), they may have more freedom to invest in emerging and niche markets that don’t need approval from company board members or outside investors, explains Matt Brunstrum.

They aren’t usually looking to get involved in the daily operations of the business, as they already align with how the business is being run and plan for a long-term strategy that usually retains existing staff. They will look for businesses that have established positive cash flow and growth potential.

Individuals

Aside from investment firms, there are many individual buyers looking to buy lower middle market businesses to become an owner/operator. They may have never owned a business before, but they may also come from a management background in Corporate America or just completed Graduate School.

These types of buyers are not looking -to re-sell to another entity. Instead, they are invested in what the company does and typically keep the current team in place to make for a smooth transition into ownership. They don’t have the deep pockets of some private investment firms, so they will be looking at financing from the owner or a bank as an option.

Determining your objectives of an acquisition can help buyers and sellers maximize the value of the deal, adds Matthew Brunstrum.