The market for mergers and acquisitions (M&A) of smaller, sub-scale businesses is experiencing a surge in activity, particularly in Australia. The recent Cut Through Venture report points to three main factors driving this trend, making it an attractive landscape for both buyers and sellers.
What Makes Sub-Scale M&A Attractive?
- Affordable Growth Opportunities: Acquiring a sub-scale business offers buyers a cost-effective path to growth. Instead of building a new business from scratch, they can leverage their existing resources and expertise to scale an existing operation, potentially achieving faster returns.
- Liquidity in a Challenging Market: The current economic environment, characterised by rising interest rates and limited fundraising options, pushes many towards seeking liquidity. Venture capital funds are under pressure to return capital to their investors, while employees and shareholders in sub-scale businesses may face financial strain due to the rising cost of living. This need for liquidity is driving secondary transactions and fueling the sub-scale M&A market.
- A Flood of Available Capital: Private equity firms, venture capital funds, and individual investors are sitting on a significant amount of “dry powder” – capital ready to be deployed. They are increasingly focusing on sub-scale businesses that demonstrate stable cash flow and the potential for rapid growth. This abundance of buyer liquidity further stimulates the sub-scale M&A market. Notably, platforms like Flippa alone represent $2.8 billion in potential buyer capital within Australia, highlighting the substantial pool of funds available for sub-scale acquisitions.
A Convergence of Factors
The confluence of these factors – affordable entry points for buyers, a need for liquidity among sellers, and ample capital ready for deployment – is creating a dynamic and active market for sub-scale M&A. This trend is likely to continue as economic conditions and investor preferences evolve.
Commentary on Sub-Scale M&A as an Exit Pathway for Founders
The surge in sub-scale M&A activity presents Founders with a compelling exit pathway. Instead of pursuing traditional routes such as IPOs or large-scale acquisitions, Founders can now consider selling their businesses to smaller, strategic buyers. This can offer several advantages:
- Faster and Simpler Process: Sub-scale M&A transactions tend to be less complex and time-consuming compared to larger deals. Founders can avoid the lengthy and rigorous regulatory procedures associated with traditional exits.
- Preservation of Legacy: By selling to a sub-scale buyer, Founders can ensure that their company’s culture, values, and mission remain intact. This is particularly important for Founders who have a strong emotional attachment to their businesses.
- Access to Resources and Expertise: Sub-scale buyers often bring valuable resources, expertise, and networks to the table. This can help Founders accelerate growth and unlock new opportunities that may not have been possible independently.
Several groups are active in the sub-scale M&A space, including:
- Corporates: Larger companies may acquire sub-scale businesses to expand into new markets, acquire specific technologies, or enhance their product offerings.
- Serial Acquisition Funds: These funds specialise in acquiring and integrating multiple sub-scale businesses, creating economies of scale and operational efficiencies.
- Private Equity Firms: Private equity firms often target sub-scale businesses with strong growth potential. They provide capital and strategic guidance to help these businesses scale and achieve their full potential.
Founders exploring sub-scale M&A as an exit pathway should carefully evaluate potential buyers, considering factors such as cultural alignment, strategic fit, and the buyer’s track record. By partnering with the right buyer, Founders can unlock significant value and ensure a smooth and successful business transition.