Lower Middle Market Deal Sourcing Strategy for 2024

Why the Lower Middle Market is Unique

The lower middle market is under-explored segment that offers unique opportunities for private equity firms. 

Unlike larger companies, lower middle market businesses are often founder-led, have less formal processes, and may not yet have tapped into their full growth potential. 

This makes them ideal targets for value creation through operational improvements, professionalization, and strategic acquisitions.

However, this space also comes with its own challenges:

• The lower middle market is highly fragmented, with thousands of small businesses spread across various sectors. Identifying the right targets in this space requires a deeper, more specialized approach to sourcing.
• Many lower middle market companies operate under the radar, without extensive financial disclosures or media coverage. As a result, traditional methods like databases or public filings can leave firms blind to the best opportunities.
• Financial reporting is often less rigorous, with many companies lacking the level of transparency that larger businesses have. This can make evaluating a company’s true value more difficult and requires a more hands-on, investigative approach to sourcing and due diligence.
• Many owners in the LMM are emotionally tied to their businesses. They may have unrealistic valuations or non-financial goals like preserving their legacy. Building trust with these sellers is critical and requires industry expertise, high-level conversations, and a deep understanding of their motivations.
• Despite being under the radar, competition for quality lower middle market deals is fierce. Traditional brokers, databases, and even in-house teams can miss out on these hidden gems, which are often secured through trusted relationships and proprietary deal flow. 

This is where SourceCo’s unique perspective comes into play—we help our PE/corporate/family office clients access off-market deals by leveraging proprietary data, giving our clients the widest angle on the market and securing the best possible deals.

What customers say:

"SourceCo was able to generate numerous actionable opportunities  within  the  first  90  days   of  the campaign in a highly competitive and niche space with consistent and detailed  reporting along with a thorough process. "

"They took the time to understand exactly what we are seeking and used their tech- enabled platform to deliver a steady stream of relevant opportunities. Huge value add to our BD team and highly recommend." - Daniel Florian, Managing Director, Sun Capital Partners

For more information, check out SourceCo's deal sourcing page, or skip ahead and request your free company dataset

Biggest Challenges in Lower Middle Market Deal Sourcing 

Sourcing deals in 2024 means competing against firms with in-house deal teams, broad networks, and massive outreach efforts—all while you also try to avoid wasting time on deals that won’t close. 

Traditional methods often miss niche, under the radar targets and leave you relying on databases that every other PE firm is already combing through, and you end up seeing the same deals as everyone else. 

The biggest challenge? 

Access. 

Without proprietary data and the technology to streamline your process, you’re left chasing the same deals everyone else is. 

Buyers need to be faster, smarter, and more targeted.

What you're up against:

• Some PE groups have large internal deal teams scouring markets and even offering rewards to finders.
• Many firms place BDRs or deal professionals in every major market they invest in, leveraging local relationships.
• Other firms have well-established BDR teams or will incentivize local professionals to live in the community to get an inside track on deals.
• Many more..

To compete in this landscape, you need more than just 'data'—you need access to 'proprietary information' that others can't easily find, and a streamlined system that makes your outreach process far more efficient.

Related:

• Best Private Equity Data Providers for 2024
• Top 13 Private Equity Conferences to Attend in 2024
• Add-On Deal Sourcing Strategies for 2024

Traditional Deal Sourcing Methods for the Lower Middle Market

In the lower middle market, traditional deal sourcing methods have remained largely unchanged for decades. 

While they have their merits, these approaches often fall short of providing the depth and speed that today's competitive environment demands. 

As Tomos Mughan, SourceCo's CEO, shared on his LinkedIn:

1. Investment Bankers and Brokers

Investment bankers and brokers are the go-to source for many private equity firms. They have established relationships and can provide curated deal flow. However, relying on them often means competing with other buyers for marketed deals, which can drive up valuations. 

They also typically prioritize larger deals, leaving lower middle market opportunities underrepresented.

2. Industry Networking

Industry events, conferences, and trade shows provide opportunities to connect with potential sellers. 

For lower middle market firms, this can be an effective way to build relationships, but it’s time-intensive and reliant on being in the right place at the right time.

3. Referrals

Many firms tap into their existing network for referrals, leveraging relationships with attorneys, accountants, portCo employees and others, but firms relying on referrals miss out on numerous opportunities that don’t cross their contacts' paths.

4. In-House Business Development Teams

Some private equity firms invest in building internal teams of BDRs to actively source deals. While this allows for more control over the pipeline, it’s expensive and requires significant resources to maintain. 

Additionally, BDR teams often lack the niche market expertise or relationships needed to penetrate the lower middle market effectively, leading to a lower success rate in finding high-quality, proprietary deals.

5. Databases and Self-Serve Platforms

Standard databases and self-serve deal sourcing platforms are another common tool in private equity tech stack. They offer broad visibility into the market but tend to rely on publicly available data.

This leaves gaps, especially in the lower middle market where many companies operate under the radar. 

And as a comparison, here is a side-by-side of the traditional deal sourcing methods with SourceCo:

How to Stay Competitive in the Lower Middle Market

Securing the right deal at acceptable terms via traditional deal sourcing methods are low.

In contrast, proprietary deal flow provides access to off-market opportunities, where competition is lower, valuations are more favorable, and deals are less likely to become bidding wars.

In the lower middle market, proprietary deal flow is even more critical. 

Companies in this space are hard to identify by advisory firms or databases, and without wider access to data, you’ll never know if it’s the best deal for you – or whether the market has more to offer.

Key Benefits of Proprietary Deal Flow:

• Other buyers don’t see the same targets
• Without multiple bidders, valuations are more reasonable, firms can avoid paying above market premium
• Early relationship-building with business owners and securing opportunities before they actively seek a sale
• Higher likelihood of success, as firms are engaging with owners who may not be looking to sell through traditional routes

Learn more:

• Proprietary Deal Flow Strategy for 2024

Find Better Deals Faster with SourceCo

SourceCo simplifies deal sourcing for private equity firms by focusing on exclusivity, efficiency, and precision.

• We provide proprietary deals that are not found on public databases, ensuring your firm taps into opportunities others miss.
• Our team delivers highly relevant, pre-screened targets based on your specific investment criteria, from niche industries to growth stages.
• We engage business owners on your behalf, ensuring conversations are led by knowledgeable professionals who understand your sector and represent your firm with credibility.
• You’ll always know what’s happening in your pipeline. Our reporting ensures complete visibility, avoiding the black hole effect common with other deal sourcing methods.

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