June 2, 2024
Q2 2024 Trends in Lower Middle Market Mergers & Acquisitions
The second quarter of 2024 showed a notable resurgence in merger and acquisition (M&A) activity in the U.S. lower middle market (LMM), building momentum after a slow 2023. With evolving market conditions and economic dynamics at play, several trends shaped the landscape.
1. Valuation Stabilization
Valuations in the lower middle market have stabilized after the fluctuations of recent years. Multiples remain strong but have leveled off compared to the more volatile period in the wake of the pandemic. For well-managed businesses, especially those in the manufacturing, distribution, and tech sectors, valuations were healthy, with average EBITDA multiples in the range of 4x to 6x depending on sector and business quality. Buyers showed an increased willingness to pursue higher multiples for companies with strong fundamentals and strategic value.
2. Seller Market Persists but Moderating
The second quarter continued to be a seller’s market, but the tide is shifting. Supply-chain-driven businesses, particularly in the manufacturing and distribution sectors, saw heightened buyer interest. However, buyers became more discerning, seeking recession-resistant businesses with strong operational histories. Private equity groups, family offices, and strategic buyers were still aggressively hunting for quality acquisitions, but they have become more cautious about overpaying as economic uncertainty looms.
3. Debt Financing Remained Accessible but Selective
Lenders were selective in providing debt financing in Q2 2024, focusing on businesses with strong balance sheets, recurring revenue models, and defensible market positions. While interest rates remained elevated, they were stable, allowing buyers to continue leveraging deals. However, companies perceived as more risky or in cyclical industries had a tougher time securing favorable financing terms.
4. Increased Focus on Operational Due Diligence Buyers conducted more thorough operational due diligence in Q2. This trend stems from growing concerns over inflation, supply chain fragility, and labor shortages, which could impact future business performance. Buyers in the LMM have been increasingly investing in post-acquisition operational improvements to unlock additional value, particularly in manufacturing, wholesale, and tech industries.
6. Regional Highlights: Southeast and Midwest
The Southeast and Midwest regions, where Topsail Capital Advisors primarily operates, saw robust M&A activity. These regions benefit from growing population centers, business-friendly environments, and strong manufacturing and logistics hubs. Construction and tech were particularly active in the Southeast, while the Midwest experienced notable growth in packaging and distribution M&A.
7. Exit Planning & Growth Capital
An increasing number of business owners in the LMM have started exploring exit options earlier as the baby boomer generation continues to retire and look for liquidity. Exit planning services saw growing demand, and many owners are engaging M&A advisory firms like Topsail Capital Advisors earlier to maximize value. Growth capital deals were also popular, particularly in tech and manufacturing, as businesses sought expansion funding. Check out GF Data for more insights on M&A trends https://gfdata.com/.
About Topsail Capital Advisors
Topsail Capital Advisors is a lower-middle market M&A advisory firm based in Greenville, South Carolina. Topsail Capital Advisors fills the gap between “main street” business brokerage firms and larger institutional investment banking firms. TCA is industry agnostic but focuses on manufacturing, distribution, wholesale, construction, tech, and packaging businesses across the Southeast and Midwest of the U.S. TCA’s core services include sell-side and buy-side representation, valuations, exit planning, and capital solutions for established, privately held companies with annual adjusted EBITDA between $500,000 and $20,000,000. Contact TCA for a market valuation and exit plan at 864-320-9442.
Sources:
- PitchBook Q2 2024 U.S. PE Middle Market Report
- GF Data Q2 2024 Valuation Trends
- Axial’s Q2 2024 Lower Middle Market Report