How the Silicon Valley Bank and Signature Bank failures affect lower middle market companies

The Silicon Valley Bank Run

On March 10, 2023, the California Department of Financial Protection and Innovation closed Silicon Valley Bank. The state agency appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

At the time of closure, SVB was reportedly the second largest bank failure ever. Leading up to the bank run on SVB, it was the 16th largest bank in the U.S. with around $209 billion in assets and $175 billion in deposits as of year-end 2022.

While Silicon Valley Bank fell to its knees, there is still hope for entrepreneurs looking to thrive in this market, even as the Fed continues to try and cool inflation to a target of 2%. 

Silicon Valley Bank and Signature Bank Failures Effect on Lower Middle Market Companies

Over the last month, headlines around the world focused on the bank failures of start-up focused lender Silicon Valley Bank and Signature Bank along with increased scrutiny on the overall health of the banking system. The uncertainty has rattled financial markets the past several weeks and larger banks have reportedly begun to tighten lending.

Current Challenges 

On top of the current banking turbulence over the last year, we’ve seen market headwinds that continue to affect middle-market companies. Higher interest rates and tightening credit aside, continued fears of a prolonged recession persist. Owners we talk to continue to struggle to fill open positions in a tight labor market. Some sectors are beginning to feel the effect of these challenges.

Beyond the Headlines

With the current backdrop, owners are concerned about the frothiness of selling the business in light of all of the economic factors. While the Private Capital Markets are not immune to the economic circumstances, we’ve found the lower middle market has not been affected by the turbulence as much as their larger counterparts have been. The headlines you hear or read about are focused on the struggles of those larger companies.

For companies that are well run with great cultures, strong management teams, and a plan for growth, the lower middle-market remains very active with prospective buyers offering strong multiples. The market feedback for the strength is a result of three contributing factors.

Factors Contributing to Strong Multiples 

There’s still a lot of cash that has been accumulated by strategic buyers, while financial buyers have monetized investments through the strong market and have capital to deploy on new investments. In turbulent times strategic buyers tend to return to the market ready to deploy cash from the balance sheet. They look to capitalize on the uncertainty and grow through acquisition of competitors or similar companies.

Secondly, with the upper end of the middle market challenged to finance deals, larger financial buyers are coming to the lower middle market to put their funds to use. The larger buyers have the ability to buy several companies over a short period of time and combine the companies. This creates an enterprise that is attractive and positioned for continued market growth. In essence they can buy smaller companies, build an enterprise and achieve healthy returns for their buy and build strategy, when they exit.

Finally we’ve been working with buyers that have cash on their balance sheets ready to deploy. In several cases they have decided to acquire companies without the use of debt financing to close the transaction. They have the patience and ability to wait for the financial markets to achieve a more steady state, at which time they will leverage the acquisition and return their equity investment. The returned equity will be used to make another acquisition and grow the portfolio holdings.

As businesses seek to remain competitive and adapt to evolving market conditions, mergers and acquisitions are not merely a way for entrepreneurs to transition ownership of their businesses – M&A serves as a power growth tool for entrepreneurs to make their companies more profitable and easier to manage while increasing market share. 

At Strategic Exit Advisors, our senior-level deal team members have seen it all and are ready to guide you to your next chapter of success. We listen to you, understand your transition goals, and tailor our process to execute a clearly defined outcome. Call us anytime (215) 489-8881 or schedule a conversation here.