Deal Size Differences: Main Street vs Middle Market

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Lower Middle Market VS Main Street Thread 🧵 to Bookmark Extremely important if you want to buy or sell SMBs to know the different vocabularies, characters you'll meet, valuation methodologies, and deal structures at different levels.

I've learned this stuff the hard way over the last 10 years of doing deals at the top of Main Street and the bottom of the Middle Market. People look at you like you're from another planet if you use the wrong language based on size of the deal or their background.

There's no universally accepted definition, but if you forced me to draw a line where Main Street Ends and Middle Market begins, I would draw it at ~$5M Enterprise Value. But in reality, it's not that simple. It's more like this:

Below $1M feels like Main Street and above $10M feels like Lower Middle Market M&A, and the grey area between $1-10M, you better know both languages. Often Seller speaks one and Buyer another. This is my favorite playground. There's wealth to be made becoming "bilingual" here.

First Let's Understand Main Street, which we'll say is $0-$5M deal size. But I'm going to break it down further into Lower Main Street <700K Deals and Premium Main Street 700K-5M Deals.

<$700K Deals in Lower Main Street are difficult. Our firm essentially stopped representing deals under this threshold because you're essentially competing with jobs. As in, if you borrow money to buy a biz in this space, you can probably make just as much or more working a J-O-B.

The smallest deals in lower Main Street can have some good opportunities, but that's also where you have the worst business brokers, the craziest sellers, worst books, hardest to finance, hardest to make a living post-closing, etc. Valuation multiples are unpredictable.

This is why I encourage first-time Buyers to keep saving their money until they can at least shop for deals 700K-5M value in Premium Main Street, which are easier to bank, and have enough earnings to pay yourself a real living wage, service acquisition debt, and some cushion.

PREMIUM MAIN STREET 700K-5M - Brokers typically call themselves "Business Brokers", "Business Advisors", or "Business Intermediaries" - Valuations are done on SDE Multiples, (EBITDA + Owner Pay/Perks + Discretionary Expenses) - SBA Financing Dominates

PREMIUM MAIN STREET 700K-5M (Cont'd) - Brokers are more "fishermen", they cast nets and drop lines in the water for Buyers to swim into or bite on. - BizBuySell is the dominant marketplace but lacks quality control, so junk deals w/bad representation overwhelm Buyers

PREMIUM MAIN STREET 700K-5M (Cont'd) - Most Deals are structured as Asset Sales - Buyer brings their own Working Capital typically except normal inventory is usually included, structured "cash free, debt free" - Buyers are usually individuals or other small businesses

PREMIUM MAIN STREET 700K-5M (Cont'd) - "Interesting", "Varied" quality of financials, but generally never get audited financials, as a result, more addbacks/adjustments to financials by Brokers needed to show Buyers the SDE Earnings Power of the companies- this is a necessity.

PREMIUM MAIN STREET 700K-5M (Cont'd) - FSBO opportunities in this space are troublesome as owners typically are not sophisticated, can't do their own financial recast properly, and unrealistic in valuation expectations. - Buyers often also unsophisticated and inexperienced

PREMIUM MAIN STREET 700K-5M (Cont'd) - Due Diligence often is little more than what's required to underwrite the SBA loan, and often Buyers attempt to do this themselves or with some help from their CPA. Look at tax returns, bank statements, payroll reports, close enough... ok

PREMIUM MAIN STREET 700K-5M (Cont'd) - Buyers have to fill the operational shoes of the Seller as Seller still often has an important role. -Buyers almost never meet any employees and employees don't know company is for sale usually until post-closing deal announcement.

PREMIUM MAIN STREET 700K-5M (Cont'd) - usually an Asking Price on the deal - Buyers and Sellers often skimp on legal, especially under $2M and use attorneys as little as possible to do lightweight agreements and even share document drafting costs sometimes.

🛩️Now let's learn about the big brother to Premium Main Street, the Lower Middle Market (LMM), which we'll say is $10M+ Deal Size. - Brokers feel insulted if called "Business Brokers" and prefer "M&A Advisor" or "Investment Banker" - EBITDA multiples rule valuations

LMM $10M+ (Cont'd) - Multiples are higher due to supply and demand (more money chasing fewer deals), and brokers often factor in projections, growth rate, and sometimes present Discounted Cash Flow (DCF) methods to valuation, whereas this is uncommon in Main Street.

LMM $10M+ (Cont'd) - M&A Advisors are more "Hunters". They build target lists of potential acquirers and proactively pursue them. Many deals come from established institutional relationships. - Axial and Pitchbook platforms can help deal sourcing/finding

LMM $10M+ (Cont'd) - LMM Buyers are also "Hunters" and often have full time deal finders, scouts, and proprietary search efforts to outreach and interface with M&A Pros and directly with Business Executives.

LMM $10M+ (Cont'd) - Buyers are often institutions: Private Equity Groups, High Net Worth Individuals or their Family Offices, Traditional Search Funds, Other Midsize Private Companies, or Public Companies. - Buyers are sophisticated and experienced

LMM $10M+ (Cont'd) - Due Diligence extremely thorough and often includes a Quality of Earnings report usually - Seller Financials much higher quality, usually CPA Reviewed by a good firm or Audited

LMM $10M+ (Cont'd) - Working Capital is worked into the deal, "there's gotta be blood in the body" or "there's gotta be gas in the gas tank" they say - Management team often met by Buyers during process, and intact post-closing and a big part of the deal.

LMM $10M+ (Cont'd) - Usually no Asking Price for the deal. Sellers don't want to put a self-imposed cap on their deal size and Buyers will do their own valuation math anyways. Brokers will sometimes "whisper" Seller's desired multiple range to Buyers.

LMM $10M+ (Cont'd) - Process can be run auction-like by brokers, and various methods are employed by M&A shops to get simultaneous competitive bidding on a company and cracking the whip on timelines, but some Buyers are turned off by these methods, so it's a dance.

LMM $10M+ (Cont'd) - Deal Structures are more exotic without the SBA regs to deal with and usually involve some combo of cash, earnout, holdback, stock swap, seller notes, etc. Buyers will pay premium Purchase Prices for good companies but engineer various downside protections.

LMM $10M+ (Cont'd) - Attorneys play a bigger role. Usually several rounds of "lawyer ping pong" on final documents with important battles fought over Reps and Warranties and the fine print since they're usually a bit more complicated in structure and sometimes Stock Sales.

Conclusion. Players from the LMM are looking at deals at the top of Main Street and vice versa. I imagine it kind of like this where two oceans are colliding, which creates some of the best feeding grounds if you understand the creatures you'll encounter in both. Visualized:

I maintain that it's in this, rich, diverse SMB ecosystem that the best opportunities are today and am positioning my company to help facilitate deals and translate between these worlds. 🐳🦈

You as a 7-figure Buyer or Seller would be wise to learn both games fluently, and be able to structure your deals, speak the right language to the right characters, and don't get married to the "right" way to do things based on the bias of the ocean you come from. /END