Shifting Trends in Lower Middle Market M&A: A Guide to Smart Business Deals

Private credit has seen a strong performance in the past year and a half due to higher interest rates causing senior lenders to pull back and unitranche loans to move back up to the true middle market. This environment led to a busy year for Resolute Capital Partners in terms of deploying funds, according to Director of Investments Tyler Augusty.

“In 2023, the types of deals we were involved in were a bit different from what we usually see,” Augusty shared at the Nashville Smart Business Dealmakers Conference. “Instead of just supporting sponsors in acquiring new platforms, we found ourselves providing additional debt and equity, either to supplement existing credit facilities or in place of senior credit facilities that were no longer interested. It was a successful year for us in terms of deployment. However, looking ahead, M&A activity is picking back up and our involvement with portfolio companies is expected to be more traditional.”

Augusty noted that the M&A market is returning to a more realistic state compared to the heightened activity seen in 2021 and early 2022. This adjustment has led to some price discovery as expectations are being recalibrated.

One positive development in the lower middle market is the increase in third-party reports that sellers are producing for potential buyers. These reports, which cover various aspects like earnings, market studies, and diligence, help streamline the due diligence process.

“Sell-side QofEs have become more common and can make transactions smoother for both parties involved, despite the additional cost,” Augusty explained. “It’s crucial for the structure and expectations to align, especially in terms of the post-transaction plan and the roles of the management team moving forward.”

Dealing with founders and businesses new to working with institutional capital providers, Augusty emphasized the importance of having sell-side advisers to help navigate the transaction process and minimize risks in the long run.