Lower Middle Market

Introduction to the Lower Middle Market

A lower-middle market company refers to established, medium-sized businesses that generate annual revenues ranging from $5 million to $50 million. These lower-middle market companies possess the following characteristics:

Established business models and a track record of profitability: Most lower middle market companies have moved past the startup phase and have been operating profitably for several years. They have proven products or services, customer bases, and consistent cash flows.

Presence in industries: Lower middle market companies often operate within fragmented or specialized industries that lack incumbents. This presents opportunities for these middle-market companies to expand their market share through acquisitions.

Annual revenues between $5M-$50M: The annual revenue range of $5 million to $50 million defines the middle market firms segment, distinguishing it from small businesses and larger middle market firms/corporations. These companies have operations and are not at the scale of large enterprises.

Size and Scope of the Lower Middle Market

The lower-end and middle market (LMM) plays a key role in the U.S. economy. It comprises 200,000 businesses that generate annual revenues between $10 million and $250 million.

LMM companies represent one-third of the U.S. private sector GDP and employ over 30 million individuals.

The lower middle market has witnessed considerable growth in the new decade. According to the National Center for the Middle Market, mid-sized businesses experienced a full annual revenue increase of over 13% in 2021, surpassing both large companies. Investment activities in the LMM also reached record levels this year, with more than 3,700 deals completed. Given the market conditions, business models, and demand for consolidation, the LMM is poised for continuous expansion and value creation.

Reasons behind the Attractiveness of the Lower Middle Market

Investors are often drawn to the LMM due to its advantages and appealing characteristics compared to larger companies. Here are some reasons:

  • Cash flows and profitability: LMM businesses are typically well-established and profitable, with proven business models that generate cash flow. This makes them less risky than startups.
  • Fragmented industries open for consolidation: Many LMM companies operate within industries with numerous small competitors. This creates opportunities for LMM firms to consolidate markets through acquisitions and gain a share of those markets.
  • More reasonable valuations/multiples: Purchase price multiples in the LMM tend to be lower than other major companies. Typically, LMM EBITDA multiples range from 5-8x as opposed to over 10x, for major firms. The LMM presents an opportunity for investors to achieve returns when exiting their investments.
  • Growth potential: Although not as scalable as startups, LMM companies often can explore opportunities for growth by entering markets, expanding their product lines, or making additional acquisitions. This growth potential enables investors to generate returns on their investments.

In summary, the LMM balances established profitability and growth prospects at valuations. This unique combination makes it an enticing option for investors seeking lower-risk returns.

Key Players in LMM Investing

The lower middle market attracts a diverse range of investors who are seeking capital deployment opportunities and the potential for strong returns. Here are some of the top players in LMM investing:

Private equity firms: Specialized private equity firms that focus on the LMM space actively acquire companies. They bring expertise and capital to help these companies execute add-on acquisitions or implement growth strategies. Prominent private equity firms operating in the LMM include Riverside, Huron Capital, and Thompson Street Capital Partners.

Family offices: Wealthy families and family members are also drawn to the market as they can directly acquire and engage with operating companies. Family offices appreciate having majority ownership and being able to implement their business philosophies.

High net worth individuals: Individual investors with accredited status are important in providing capital to companies in the middle market (LMM). They can invest directly or via equity funds. These investors are particularly attracted to the potential for cash yields and growth.

Owner-operators: In LMM deals, owner-operators are involved who choose to reinvest their equity and maintain a stake in the business they have built. These operators bring industry expertise and established relationships, which greatly contribute to the success of deals.

Investors interested in the LMM are those seeking ownership roles and possess the ability to provide hands-on support for driving growth. The highly fragmented nature of this market also has increased competition and presents opportunities for investors to seek out niche acquisition prospects.

Typical Dynamics of LMM Deals

The lower middle market category segment primarily encompasses companies with revenues ranging from $10 million to $100 million. Deal sizes within this segment typically vary between $10 million for businesses and up to $100 million for ones approaching the upper threshold.

LMM's valuation is often determined based on multiples of EBITDA, generally between 5-8x and EBITDA. Compared to regular deals, these multiples are more reasonable due to the nature of the LMM, making valuations more attractive for potential buyers. In Q1 2023, middle market private equity deals had an EBITDA multiple of 6.8 times.

The LMM presents investors with opportunities to acquire businesses at reasonable valuation multiples. The deal dynamics make it an appealing market for those seeking high-quality companies with cash flows and growth potential.

LMM Investment Strategies

Equity firms operating in the lower middle market employ various investment strategies to generate returns for their funds. Some common approaches include:


This strategy involves acquiring a platform company and subsequently acquiring companies to expand its reach. By consolidating markets, private equity firms can benefit from economies of scale, potential and operational synergies. The goal is to acquire competitors, suppliers, or distributors and integrate them into an efficient business.

Niche Consolidation

Firms focus on industries and acquire multiple companies within those industries. By consolidating the niche through acquisitions of competitors, they aim to gain market share. This allows more companies under them to dominate in that industry with less competition.

Leveraged Recapitalizations

This strategy, also known as recaps, involves restructuring a target company's balance sheet by adding debt. The proceeds from the debt are then paid out as dividends to the equity firm for operational purposes. This approach enables them to extract cash while maintaining ownership-employed capital assets.

Growth Capital

Instead of acquiring control over a company, firms provide growth capital injections to support expansion efforts. This offers liquidity for owners while fueling business growth. Businesses with growth potential are generally the target of growth capital.

Opportunities for Entrepreneurs

Entrepreneurs looking to build their businesses and, eventually, their capital assets can find new investment opportunities in middle-market companies. Here are a few important things for entrepreneurs to consider in the LMM space:

Preparing for Liquidity Events/Exits

To position their company for attractive exits or investments from private equity firms, entrepreneurs must focus on driving profitable growth, professionalizing operations, and building a solid management team for growth acquisitions. Well-run, profitable LMM companies with strong growth prospects and leadership teams appeal most to investors. To benchmark their progress, entrepreneurs should track annual revenue, growth, EBITDA margins, and cash flows.

Working with PE Investors

For eventual partnership with private equity, entrepreneurs must demonstrate their value-add and willingness to stay involved post-investment. Most PE firms want entrepreneur operators to retain minority stakes and participate in a buy-and-build strategy. Entrepreneurs should focus on strategic planning, M&A capabilities, and leadership development to show they can drive growth alongside a financial partner.

Reinvesting Proceeds

The experience from running and eventually selling a market (LMM) business can provide business owners with valuable expertise for taking on larger companies or exploring new entrepreneurial opportunities with reduced risk. With planning, entrepreneurs can achieve an exit while maintaining their involvement in the LMM as investors and operators.

Opportunities for Investors

Investors can find abundant deal flow and attractive returns in the lower middle market. Some key investment opportunities may include:

- Sourcing and evaluating deals - Many lower middle market companies are privately owned by founders or family-run businesses that are not actively marketed for sale. Investors need to leverage their networks and relationships to find deal opportunities. Additionally, performing thorough diligence is essential to evaluate the company's financials, competitive position, growth potential, management team, and possible risks.

- Building a portfolio - With smaller deal sizes, investors can diversify their portfolio across 10-20 companies within the $10 million to $100 million range. Creating a portfolio helps mitigate risks associated with investments. Investors often focus on industry verticals, geographic regions, or areas where they possess operating expertise in building portfolios.

- Adding value - Unlike corporations, lower middle market businesses can benefit from the guidance, financial expertise, operational improvements, and professionalization that private equity investors bring. These investors work closely with management to drive growth through acquiring businesses, expanding into regions, introducing new products/services, enhancing operational systems and controls, and attracting high-quality talent.

With the strategy, networks, experience, management skills, and value-added capabilities, the lower and upper middle market presents investors with a stream of attractive opportunities. They can secure deal terms while achieving portfolio diversification, and the lower middle market portfolios have the potential to generate significant returns.

Opportunities for Advisors

The lower middle market offers a range of opportunities for advisors to apply their skills. Advisors can engage in transaction services such as mergers and acquisitions (M&A) and capital raising. Additionally, they can provide consulting expertise and operational support while leveraging their industry knowledge.

Transaction Services

Many advisors focus on transaction-related services for lower middle market companies, including:

- Mergers and acquisitions - Advisors can represent buyers or sellers in LMM dealmaking. This may include sourcing acquisition targets, preparing marketing materials, running diligence, structuring deals, and negotiating transactions.

-Capital raising - Advisors help LMM companies raise growth capital or execute recapitalizations. Services offered include developing fundraising strategies, creating materials identifying potential investors, and successfully closing financing deals.

- Fairness opinions - One valuable role of advisors is to provide fairness opinions, where they assess the terms of a deal and offer insights. Their expertise and impartiality contribute to better outcomes for shareholders.

Consulting and Operations

Additionally, advisors offer consultation services in areas like strategy development, operational improvements, and financial management. Let’s check out more service areas:

-Growth strategy consulting - Evaluating markets, formulating strategic plans, and identifying expansion opportunities.

-Performance improvement - Reviewing operations and processes, identifying areas where performance can be enhanced and costs reduced.

-Financial management - Acting as a CFO overseeing accounting procedures, reporting systems, budgeting processes, financial analysis, and long-term planning.

Experienced advisors possess industry knowledge that adds value. They understand the landscape, operational challenges, technological advancements, financial requirements, and performance benchmarks within an industry. This expertise enables them to support deals and provide tailored consulting services for companies operating within the middle market (LMM).


In conclusion, the lower middle market (LMM) allows entrepreneurs to manage investors and advisors seeking companies with robust cash flows and growth potential. Key characteristics of LMM companies include revenues ranging from $5M to $50M, brand presence, and operations within fragmented industries rather than consolidated ones.

Regarding the dynamics of deal transactions, the market (LMM) usually falls within the range of $10M to $100M, with EBITDA multiples ranging from 5x to 8x. Investment strategies commonly employed include platform/buy-and-build approaches consolidating niche markets, leveraged recapitalizations, and providing growth capital.

The LMM attracts players, including equity firms, family offices, high-net-worth individuals, and owner-operators. For entrepreneurs, positioning for an exit or investment in the LMM can yield results. Investors can take a competitive edge because of lower valuations and fragmented markets that present opportunities for consolidation. Advisors can effectively tailor their services and target LMM networks more efficiently.

Overall, the LMM offers a space within the economy for those acquiring, selling, or investing in well-established middle-market businesses. This guide has provided an overview of the LMM landscape, the players involved in typical deal structures, and ways to engage in this market segment.

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