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Intelligence Digest: 2Q23 M&A Market Update

Posted On August 9, 2023

Large corporations and financial sponsors emerging as buyers. However, these same players have significantly slowed down as sellers, creating a sharp divergence in the market.

Our analysis reveals that private founder-owned businesses have become the main source of M&A activity. This trend has been gradually increasing over the past several years and has recently surged to new heights.

The Small Business Administration reports that there are around 33.2 million small to medium-sized businesses in the US, most of which have fewer than 20 employees and are owned by their founders. This is in contrast to the fewer than 75,000 US companies with external Private Equity, Venture Capital, or Angel Investor support (PitchBook; Small Business Administration, Geography: US *As of March 31, 2023). The large volume and variety of non-backed companies can make them attractive to potential acquisition by corporate and sponsor buyers.

M&A Trends: Non-backed Companies on the Rise 

Founder-owned companies have consistently made up a significant portion of M&A deal counts due to the vast size of the investable universe. According to a PitchBook research report, "Founder-Owned Businesses Are Attractive M&A Targets " data as of 3/31/2023, reveals that Nonbacked businesses constituted 60.3% of all acquired companies in 2007, which decreased to 52.6% by 2015. However, there has been a recent surge in M&A involving these companies as sellers. In Q1 2023, nonbacked private companies accounted for 61.5% of all deals, the highest percentage seen since the global financial crisis, despite a decline in other seller types. 

The exit market has slowed due to market dislocation between buyers and sellers. Sponsor-backed companies and large corporates appear to be holding out for higher prices and better market conditions, leading to a decline in sponsor-backed M&A exits and divestitures. With the IPO market all but disappeared, M&A becomes an attractive option, leading companies to hunker down and focus on growing back into their previous valuations. Financial sponsors are aggressively pursuing add-on acquisitions in an attempt to spread acquired revenue over higher interest expenses. In this environment, non-backed private business owners are historically in greater demand, and deal sizes have shrunk. Sponsors and corporate buyers are likely to continue investing in smaller, non-backed companies as long as they are conducive to earnings growth.

Founder-owned businesses are typically controlled by a handful of founding employees or family members without outside investors. They have fewer moving parts and less complexity than other ownership structures. When it comes time to take money off of the table, decision-making can rest with a single individual or several generations of a single family. For a desirable founder-owned target that attracts multiple bids, selecting the right partner can often involve multiple variables. The founder seeks a strong feeling of price and fit, where the purchase price adequately reflects their life's work, and the new owner will continue to nurture the company and take it to another level of growth and profitability.

Founder-Owned Businesses: Top Sectors for Deals 

According to PitchBook Research data as of 3/31/2023, the B2B, B2C, and financial services sectors have the highest proportion of deals involving founder-owned businesses as targets. B2B ranks first, with nonbacked businesses accounting for 66.6% of its total deal count as of Q1 2023, followed closely by financial services at 63.7% and B2C at 61.7%. By contrast, IT has the lowest proportion of total deals from nonbacked sources, as it often attracts outside investment earlier in the business life cycle due to its strong presence in the VC and PE ecosystems. B2B and B2C industries are currently highly fragmented, enabling smaller businesses to compete effectively for market share.

Why Founder-Owned are Attractive Targets

  • Easier to effect change and "professionalize," leading to growth.
  • No previous funding from sponsors provides for less cultural conflicts.
  • Closer to ground floor in terms of value creation opportunities.
  • Ability to tap into expertise of financial sponsors to enhance go-to-market strategy.
  • Little debt on balance sheets, make them easier to lever up for acquisitions.
  • Any debt that is on the books can be potentially swapped out for cheaper debt, improving bottom-line performance.
  • There's millions of non-backed private companies in contrast to only thousands of backed companies. This vast pool, offers corporate and sponsor buyers the freedom to choose from a wider range of options in the case that they need to fill a specific niche or sub-vertical to enhance their product offering.
  • Relatively cheaper to buy compared to sponsor backed exit opportunities, making them more lucrative targets for shareholders seeking strong IRRs.

Why Founders are Ready to Exit

Founder-owned businesses are facing tough economic and inflationary headwinds, and their liquidity is being squeezed due to the drying up of credit provided by regional banks. This is leading to an expanded presence of founder-owned businesses as sellers in the market, and this trend is likely to continue throughout the year. 

Aging founders without a clear succession plan for their closely-held companies can benefit from partnering with a skilled PE buyer or investor. According to data from an article published from 06/28/2023, only 30% of family-owned businesses survive the transition from first- to second-generation ownership, and 12% survive the handoff from the second generation to the third. Partnerships can pave the way for a much more orderly transition and successful outcome for all involved. 

Finally, founders are motivated by higher levels of performance and financial rewards their companies can achieve by partnering with a financial sponsor or corporate buyer, which typically involves a rollover equity stake that is fully realized by the founder when the sponsor exits the investment.


In conclusion, the aforementioned headwinds have created a challenging environment for founder-owned businesses. As a result, an increasing number of these businesses are becoming sellers in the market. For aging founders who lack a clear succession plan, this situation can present significant risks to the long-term survival and prosperity of their companies.

We recognize the importance of addressing these challenges and offer a solution that benefits both buyers and sellers. For aging founders seeking a smooth transition and a higher likelihood of business continuity, partnering with a skilled private equity buyer or investor can be a game-changer. Statistics show that only a small percentage of family-owned businesses survive the generational handoff, making a partnership with a financial sponsor a prudent choice.

By utilizing our investment bank, founder-sellers can tap into our expertise and broad network of potential financial sponsors and corporate buyers. These partnerships pave the way for a more orderly transition. Moreover, the inclusion of a rollover equity stake that is fully realized by the founder when the sponsor eventually exits, adds an extra layer of motivation for the founder to pursue such partnerships, because of the potential for increased performance and financial rewards for the company.

In light of the prevailing market dynamics and the potential benefits to both buyers and sellers, our investment bank stands as the ideal facilitator for connecting founder-owned businesses with the right financial sponsors or corporate buyers. As the trend of founder-owned businesses as sellers continues throughout the year, now is the opportune time to understand why you should consider investment banking for your business growth.

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