Harvard Business Review
By Nancy Langer and Sharon B. Heaton
Private equity investors, roaring ahead to another prolific year of deals, are increasingly eyeing buys hidden away in the lower middle market: companies valued between $10 million and $100 million.
It’s not uncommon these days for these investors to pursue strong founder-led or family-owned companies in the $100 million, $50 million, or even $25 million annual revenue size. According to The National Center for the Middle Market, many are “B2B organizations that operate within the supply chains of other larger businesses” — sturdy bolt-ons or platforms that offer innovative product designs, compelling business models, or a valuable stable of workers.
But when private equity (PE) tries to capitalize on the growth potential of the lower middle market, they face a challenge: cultural literacy. And as Peter Drucker is said to have observed, “Culture eats strategy for breakfast.” Our years of doing deals in this part of the market have taught us that without cultural literacy, one cannot build a depth of trust with these hardworking owners, clinch a deal, or even master a smooth post-close integration.