Gary Kane found a niche in the lower-middle market which tends to be overlooked by a lot of investment banking firms. Chimera Strategies has been thriving in that space since Kane founded it in 2011. Chimera works with businesses between $3M and $25M that are above the business broker line and below the typical investment banking line.
Kane doesn’t approach his prospects as a glorified business broker, but as a simplified investment banker who understands the need for advisory in a revenue range that can’t attract the attention of investment bankers due to the fee structure. A business broker usually follows something similar to a real estate model with listings on a buy-sell website that are marketed passively. The close rate is only around 20% and the deal is usually facilitated by an independent broker with varying motives. Investment bankers work on much fewer deals with higher close rates through controlled auctions and competitive processes and they use active marketing tactics to find a buyer.
Strategic vs. Financial Buyers
In the lower-middle market, Kane primarily works with strategic deals. Larger investment banking firms don’t play in this space as it is difficult to meet the minimum fees, a significant portion of the private equity buyer pool is not interested in the market, financials of selling firms are usually not audited, the business is often not growing and there are no lenders in that space. So that often leaves strategic buyers.
Strategic buyers are ideally in the same or similar industry and geography which allows them to pick up inventory, locations, and people, and 86% of Kane’s deals are done with those criteria.
Financial buyers don’t play in the lower-middle market because of size since it is essentially the same amount of work to do a $5M deal as it is to do a $500M deal. The other problem is that financial buyers are not operators and in the lower-middle market, many of the businesses lack a second layer of management which means that there is no one to run the business when the owner exits.
Since there are no lenders in the lower-middle market space, almost all of Kane’s terms include 50-60% cash with a balance of a seller’s note and/or an earn-out. An owner’s note is a promise to pay a portion of the purchase price on the back end and an earn-out is a percentage payout contingent on performance over time.
It is a seller’s market right now and buyers want to put their money to work, so with the help of investment bankers like Gary Kane, business owners are cashing out while the times are good. Just because a business is in the lower-middle market does not mean they have to forfeit quality advisory and Chimera is consistently proving the difference that it can make.
Listen to the Fueling Deals podcast episode featuring Gary Kane’s interview about Strategic Deals in the Lower-Middle Market.