Deal Dynamics in the Lower-Middle-Market: Software, Commercial Services, BPO

Nov 14, 2024

Guest

Anthony Walker

In this engaging discussion, guests Anthony Walker and Dustin Sellers from Next Coast Legacy, along with Conor Tidgwell from Avidbank, dive into the intricacies of lower-middle-market transactions. They highlight how businesses acquired at single-digit multiples can be flipped for double digits through operational improvements. The conversation covers the growing demand for outsourcing in commercial services, the importance of customer retention, and the appeal of niche software investments. The trio shares insights on market trends and the critical nature of EBITDA in evaluating potential deals.

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Intro

00:00 • 2min

Navigating Business Process Outsourcing in Lower-Middle Markets

02:05 • 6min

Understanding Business Criticality through Retention and Margins

07:57 • 2min

Understanding Seller Dynamics in BPO

09:46 • 9min

Exploring the Resurgence of Commercial Services in the Lower Middle Market

18:55 • 2min

Navigating Lower-Middle-Market Challenges

21:23 • 19min

Navigating Profitability in Software Investments

40:17 • 3min

Businesses acquired in the lower-middle-market at single-digit multiples of EBITDA can be sold for double-digit multiples, but only if the new owners improve operations and grow earnings, according to three veterans of the Entrepreneurship-Through-Acquisition (ETA) search-fund market.

Multiples arbitrage, seller dynamics, buy-and-build opportunities and market mega-trends are attractive features of three industry sub-sectors discussed in this Search Party episode: software, commercial services and business process outsourcing (BPO).

While competition for deals remains fierce in the software lower-middle-market, there are "riches in the niches," says Anthony Walker, a Managing Partner at ETA private equity firm Next Coast Legacy. Walker notes that ETA searchers need to find software businesses that are growing strongly but also profitably. What many investors, and lenders, are looking for is "the perfect mix" of "healthy EBITDA with healthy ARR," says Conor Tidgwell, Senior Vice President at Avidbank, which provides financings to ETA and other lower-middle-market transactions.

The enormous commercial services sector is benefiting from outsourcing trends among lower-middle-market businesses. But many ETA searchers find these businesses - such as HVAC maintenance, landscaping, restoration - to be uninteresting, opening up opportunities for investors who see value, if not glamor. With the right management, commercial services businesses can be vastly improved improved through the application of sales and marketing resources, as well as the use of technology, says Dustin Sellers, a Managing Partner at Next Coast.

Included in the episode is a discussion of the seller dynamics in the three sub-sectors. In the case of BPO and commercial services businesses, the CEOs often are founders who personally provided the services that serve as the companies' core offerings. These founders may not have the skillsets to take their businesses to the next level, and therefore may be open to an outreach from an ETA searcher.

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