April 20, 2020

Baird’s Business Owner Solutions team, which advises emerging growth and lower middle-market companies in mergers and acquisitions, value and marketability assessment, and transition planning, recently provided the following update on M&A activity in the lower middle market.

Many businesses dependent on supplies from China received the first warning signs that something was wrong in mid-January as supply chains were disrupted. In fact, COVID-19 had already disrupted the supply chain for approximately 75 percent of U.S. companies before March 5th.1 However, even as U.S. businesses struggled to receive materials from China, few expected the virus would shut down much of the U.S. economy and alter some industries—such as retail, hospitality, and restaurant businesses—for years to come.

In the past few months, almost all businesses have closed or significantly reduced operations to limit the spread of COVID-19. While the long-term impact for owners looking to sell their small and lower middle market businesses is unknown, we remain cautiously optimistic. Currently, deal making has largely evaporated in this market as buyers focus on preserving liquidity, keeping employees safe, and surviving the crisis as unscathed as possible. In the coming weeks, as the economy restarts, we expect a gradual return to the “new normal” as the economy was strong prior to the shutdown.

In recent years, Private Equity (“PE”) firms have been a popular exit option for many lower-middle market business owners looking to retire. These PE buyers have largely shifted their focus to existing portfolio companies, concentrating on maintaining neutral cash flow positions. Our recent discussions with these buyers are summarized as follows:

  • Any new deals under consideration are on hold as companies wait out the current uncertainty.
  • There are a handful of timely exceptions, such as add-ons, pulsing through the market. However, because most buyers conduct in-person meetings, it will be difficult to close deals until states ease travel restrictions.
  • For deals further along in the sale process and already in agreement on price and terms, it is a mixed bag; some are moving forward while others have been put on hold. Nevertheless, there seems to be a prevailing sense of difficulty on final closings scheduled in the next 30 to 60 days.

While some expect a run to close deals in 3Q and 4Q 2020, others predict 2020 to be a tough year for deal making. HKW President and CEO Ted Kramer recently noted, “It is unclear when the virus will abate. When it does, the U.S. will resume the process of electing its next president. Such uncertainty usually causes the M&A market to go on pause.”2 Currently, many think it is unlikely to see new deals to hit the lower-middle market until June, making it a quick—but not impossible—turnaround to get something done before year end.

Although the timing of resumed deal flow is uncertain, it is clear businesses will have to account for the losses (or gains) caused by COVID-19; these adjustments are likely to be a core component of deal negotiations. Most small businesses are scrambling to apply for loans and other Federal aid instituted by the recently passed CARES act. How buyers will treat 2020 results will vary from buyer to buyer and company to company, but many expect to place more emphasis on 2020-2022 forward-looking statements and the need for credible business plans supporting them. Many deal makers see minimal long-term impact to valuations for good lower-middle market companies and expect well-run, solid businesses will still have exit options at fair valuations. For weaker lower-middle market businesses in industries directly impacted extended stay-at-home orders, some significant negative impact is likely. In other words, it is unlikely weaker companies will see the same high valuations post-COVID in the near term.

Nevertheless, both private equity firms and strategic buyers are sitting on large amounts of dry powder. Strategic buyers have been conserving cash and drawing on available debt funds if available. As of December 2019, private capital funds (debt and equity) have approximately $2.5 trillion in committed, undeployed capital.3 In addition, $130 billon was raised in the first quarter of 2020,4 leading us to expect many groups will be chomping at the bit to get deals done as the uncertainty begins to clear and some sense of normalcy returns. When that should occur, only time will tell.

For additional information, please contact:

Andy McKay
Managing Director
(o) 502 588-8484
(c) 502 500-1376  

John Mascarich
Managing Director
(o) 502 588-8409
(c) 502 387-8817  

John Sweeney
Managing Director
(o) 502 588-8483
(c) 502 649-3899 

Leo Whitt
Managing Director
(o) 513 345-5265
(c) 502 338-5736 

Chris Johnson
Vice President
(o) 502 588-8488
(c) 502 718-5296 

Jackson Barefoot
Vice President
(o) 502 588-8481
(c) 502 500-0005 

Jason Spitz
(o) 502 588-8475
(c) 502 328-7084 

Elizabeth Egan
(o) 502 588-1185
(c) 502 558-5036 

Evan Ferreby
(o) 502 588-1799
(c) 502 693-3009 


1 Institute for Supply Management. “COVID-19 Survey.” March 11, 2020.

2 Beltran, Luisa. “A Private-Equity Firm Turns to Triage as Coronavirus Strikes.” Barron’s, March 31, 2020.

3 Preqin. “Private Capital Performance Update: Q2 2019.” June 30, 2019.

4 Preqin. “Preqin Quarterly Update: Private Equity & Venture Capital Q1 2020.” April 8, 2020