Search Party

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

Nov 14, 2024

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.

43:06

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Episode guests

Conor Tidgwell

Dustin Sellers

Anthony Walker

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Episode notes

Podcast summary created with Snipd AI

Quick takeaways

The lower-middle-market presents lucrative investment opportunities in sectors like commercial services and BPO, driven by outsourcing trends and technology adoption.

Acquiring software businesses requires a focus on sustainable profitability and healthy revenue metrics to navigate the increasingly competitive market landscape.

Deep dives

Emerging Mega Trends in the Lower Middle Market

The commercial services sector is experiencing a significant mega trend, particularly attractive within the lower middle market due to its large segment size and prevalence of regional businesses. Many lower middle market entities are focused on core competencies and are increasingly looking to outsource ancillary services like HVAC and facilities management. This shift aligns with broader trends seen in business process outsourcing, where businesses are recognizing their potential to streamline operations by turning to specialized service providers. Consequently, the sector presents viable investment opportunities for those willing to navigate its complexities and challenges.

Intro

2min

Navigating Business Process Outsourcing in Lower-Middle Markets

6min

Understanding Business Criticality through Retention and Margins

2min

Understanding Seller Dynamics in BPO

9min

Exploring the Resurgence of Commercial Services in the Lower Middle Market

2min

Navigating Lower-Middle-Market Challenges

19min

Navigating Profitability in Software Investments

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.

Search Party Lead Sponsor:

Next Coast Legacy https://lnkd.in/eSAuRW5p

Search Party Sponsors: Avidbank https://www.avidbank.com/

Boulay - Contact Boulay's Search Fund Team: https://lnkd.in/eFF88SVf

Mayer Brown https://lnkd.in/gU7sPPSg

Plexus Capital https://plexuscap.com/

Search Party video-podcast website: https://lnkd.in/efJEa6GV