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Lower Middle Market

Definition - What does Lower Middle Market mean?

Lower middle market is the lower end of the middle market segment of the economy, as measured in terms of annual revenue of the firms. Firms with an annual revenue in the range of $5 million to $50 million are grouped under the lower middle market category.

These firms are ranked just above the small and medium enterprises (SME) or Main Street firms with revenue lower than $5 million.

Lower mid-market firms play a significant role in the national as well as global economy. The classification helps investors to weigh the high growth potential of the category against the risk involved in order to arrive at the judicious valuations.

Divestopedia explains Lower Middle Market

The middle market firms are further classified as:

  • Lower middle market
  • Middle middle market
  • Upper middle market
While the commonly used criteria for this classification is the annual revenue, other metrics, such as number of employees and the tangible capital assets employed, could be more appropriate in many cases. Both in the Euro zone as well as in U.S., the lower mid-market firms significantly contribute to the gross domestic product as well as the employment generation in the respective national economies.

Some boutique investment banks and private equity firms focus on this specific segment of the middle market, and develop expertise in doing deals in this space. Many potential buyers are searching for acquisition targets in the lower middle market because valuation multiples tend to be lower. Also, operational improvements in lower middle market businesses can be more easily obtained by experienced business buyers.

Companies in the lower middle, which are likely to grow and become a part of the higher segment, generally command a valuation premium. The classification, thus, helps the healthy development of a divestment market.

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Resources

  • Equicapita: Equicapita
    Equicapita's model is to acquire established, private small and medium sized enterprises (“SMEs”) located primarily in Western Canada.
  • Evolution Capital: Evolution Capital
    Leaders in growing small business.