{"id":360187,"date":"2025-02-27T12:47:38","date_gmt":"2025-02-27T17:47:38","guid":{"rendered":"https:\/\/chiefexecutive.net\/?p=360187"},"modified":"2025-02-27T12:47:40","modified_gmt":"2025-02-27T17:47:40","slug":"the-real-hot-commodity-mid-market-businesses","status":"publish","type":"post","link":"https:\/\/chiefexecutive.net\/the-real-hot-commodity-mid-market-businesses\/","title":{"rendered":"The Real Hot Commodity? Mid-Market Businesses"},"content":{"rendered":"\n

Gold sits near record highs, oil continues to drive nation states and rare earth minerals are reshaping geopolitics and grabbing headlines.<\/p>\n\n\n\n

But today\u2019s truly hot commodities are America\u2019s unheralded mid-market businesses, specifically those we call the \u201cUpper Middle Market\u201d\u2014those businesses between $50 million and $1 billion in revenue that readers of Chief Executive<\/em> magazine most commonly run. The gold rush won\u2019t be slowing anytime soon.<\/p>\n\n\n\n

Between 2019 and 2024, the average EBITDA multiple for transactions between $10 million and $250 million\u2014across all industries, geographies and quality of earnings\u2014went from approximately 6.6x to 7.1x by the middle of last year\u2014despite the wild market gyrations fueled by Covid and inflation.<\/p>\n\n\n\n

You can thank the private equity industry for that. PE, as you all know, has become a behemoth, gobbling up these businesses with little concern for whether they make networks (Barracuda Networks) or noodles (P.F. Chang\u2019s).<\/p>\n\n\n\n

Any mid-market CEO who has ever sent an email gets regularly bombarded by ambitious private equity principals, ready to wine, dine and fawn over you in an effort to pry your business from your hands (into their pockets) without competition. Without your business, they can\u2019t deploy capital, earn their fees and share of the flip. We\u2019re already seeing a reduction in returns for many firms, and fundraising has become a winner-take-all proposition, with the largest firms gaining the vast majority of new investments.<\/p>\n\n\n\n

It speaks to a fundamental\u2014and under-discussed\u2014math problem that private equity is facing. An oft-used PE tool is to examine the Total Addressable Market (TAM) of a potential target company. Utilizing their own TAM tool, you quickly see PE has a structural problem that limits their growth potential\u2014and will likely continue to drive up prices for mid-market businesses.<\/p>\n\n\n\n

There are an estimated 18,000 private equity firms in the U.S., up nearly 60 percent in just the last five years. These firms have an estimated $1.6 trillion in funds raised but not yet spent (\u201cdry powder\u201d).<\/p>\n\n\n\n

At the same time, there are only ~49,000 upper-middle market businesses, according to the U.S. Federal government\u2019s official Business Census. Private equity already owns around half of the available pool. Many of the rest are not (and may never be) for sale.<\/p>\n\n\n\n

Some may think that relief for private equity can come from buying even larger companies, those with $1+ billion in revenue. But the math there is even worse: there are only 3,354 of these companies in the U.S. Many of these businesses are publicly traded, making PE ownership very difficult (and expensive). That\u2019s why private equity keeps hunting for smaller companies in the lower middle market.<\/p>\n\n\n\n

So whether an exit to private equity may or may not be in your future, it pays to get your organization in top shape. Some essentials include:<\/p>\n\n\n\n