Cash Plus Cultural Literacy

Cash Plus Cultural Literacy  
What Private Equity Needs in Lower Middle Market Deals  

Mindy Barker | Barker Associates

Last year was a record year for private equity. With pandemic related stimulus, there was an increase in dealmaking and exits, as well as new records in deal values. But the drastic increase in inflation, along with extensive supply chain disruptions throughout the world, left many wondering what would happen in 2022.  

Much of that speculation is the continued shift in attention toward growth equity and middle markets. Lower middle markets (defined as $5m – $100m in revenue) offer innovative solutions and compelling business models, and they are ripe for private equity investments. Yet, there appear to be some challenges – namely, cultural literacy – holding back some of these deals. 

We’ve all been hearing about the importance of organizational culture recently. It has seemingly never been as important in trying to attract top talent and offer an engaging, fulfilling employee experience. But long before the Great Resignation left leaders scrambling to fill vacant seats, lower middle market companies placed great value on their culture.  

These are companies that more often than not still have their founders involved, working toward their vision to move their companies further along. There is a sense of pride and accomplishment. There is often a sense of family when it comes to employees – these are the people who helped the founders realize their vision in the first place. And this strong sense of culture is not taken lightly. 

When a private equity firm is interested in a lower middle market company, they must first understand this culture – and that it is different from larger companies. Cultural literacy creates the level of trust required for a successful deal. It’s as important as speaking the same language (or having a really great interpreter). But too often, that’s not the case. They are simply not accustomed to dealing with each other … and they must learn each other’s languages. 

Why the Disconnect? 

There are many reasons the “languages” differ among lower middle market and private equity firms. However, finding common ground is crucial to making these deals that will ultimately benefit both parties.  

A recent Harvard Business Review article pointed to a few notable reasons for this disconnect: 

  1. Education. A majority of investors at private equity firms hail from top universities, with advanced degrees, whereas successful lower middle market founders and leaders may not have pursued graduate degrees. In some cases, they may not even have undergraduate degrees. Degree or not, their success often stems from their incredible innovation, hard work, and perseverance.  
  1. Experience. Many in the lower middle market have little or no experience in mergers and acquisitions, while, clearly, private equity firms have plenty. That, in and of itself, can be an entirely new language to learn. 
  1. Values. The founders of lower middle market companies typically have strong employee retention rates. In fact, some of their employees may have been there since Day 1. They are a family, and founders want to protect their families. Many will care as much, or even more, about their employees than a big payday. Private equity firms must shift to understand that the purchase price may be only one piece of the total value to them. 

These are not insurmountable challenges. And with consideration of each party’s perspective, these deals can, and will, go through successfully. But just like in any deal where different cultures exist, it takes time, patience, and understanding. 

Barker Associates provides strategic guidance to companies of all sizes. We provide the higher level of strategy your company needs to grow, especially as it relates to the support needed in a merger or acquisition of any size. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.