Tag Archive for: M&A

Reframing Value in the Lower-Middle Market

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Reframing Value in the Lower-Middle Market

For business owners operating in the R20 million to R30 million EBITDA range, the path to a successful exit is often less straightforward than expected.

These businesses are established, profitable, and operationally proven. Yet when owners begin exploring a sale, they frequently encounter a market that does not fully recognise their value.

This segment of the market, commonly referred to as the lower-middle market, sits in a structural gap. It is a space where strong businesses are often overlooked, misunderstood, or undervalued, not because of weak fundamentals, but because of how they are positioned and assessed.

A Market That Sits Between Two Worlds

Businesses in this EBITDA range are often too large for individual buyers or smaller independent sponsors. At the same time, they may fall below the threshold required to attract larger private equity firms or strategic acquirers seeking immediate scale.

This creates a narrower and more nuanced buyer universe, requiring a more considered approach to positioning and execution.

Why These Businesses Are Often Overlooked

Despite their scale and profitability, businesses in this segment tend to face a consistent set of challenges when brought to market.

  1. The “No Man’s Land” Size Dynamic: They fall between buyer categories. Too large for informal buyers, yet too small to attract institutional capital at scale.
  2. Key-Person Dependency: Many businesses remain closely tied to the founder, particularly in strategy, client relationships, and operational oversight. This creates perceived continuity risk for acquirers.
  3. Limited Institutional Infrastructure: While financially successful, these businesses may lack formal management layers, sophisticated reporting systems, or documented processes expected in a transaction environment.
  4. Concentrated Operational Risk: Exposure to a small number of customers, suppliers, or revenue streams can elevate perceived risk during diligence.
  5. Lower Valuation Multiples: As a result of the above factors, these businesses typically trade at lower EBITDA multiples, often in the 3x to 6x range, which can constrain exit outcomes if not properly addressed.

Reframing the Opportunity

When viewed through a more informed and strategic lens, these same businesses present a compelling investment case.

  1. Proven and De-Risked Earnings: At this level of EBITDA, businesses have established models, stable cash flows, and demonstrated resilience.
  2. Ideal for Bolt-On and Consolidation Strategies: They are highly attractive as bolt-on acquisitions or as part of broader roll-up strategies, where scale and synergies can unlock significant additional value.
  3. Clear Path to Operational Upside: Opportunities often exist to enhance value through improved systems, management structures, and operational efficiencies.
  4. Less Competitive Deal Environment: With fewer large buyers actively pursuing this segment, transactions can be executed with less competitive tension.
  5. Strong Cash Generation and Financing Potential: These businesses typically generate sufficient free cash flow to support leveraged transactions.

The Importance of Normalisation and Positioning

A further nuance in this segment is that reported earnings do not always reflect underlying performance.

It is not uncommon for businesses to sit just outside the R20 million to R30 million EBITDA range on a reported basis, yet fall within it once appropriate normalisation adjustments are applied.

These adjustments may include owner-related costs, non-recurring expenses, or accounting treatments that obscure the true earning capacity of the business.

Without careful analysis and clear articulation, this value can be misunderstood or discounted.

Positioning is therefore critical. The objective is to ensure that the economic substance of the business is properly understood by a credible buyer audience.

A Disciplined Approach to Market

In our experience, successful outcomes in this segment are typically driven by a structured, two-phase process.

The first phase is a rightsizing and preparation phase. This involves assessing the business through a buyer’s lens, normalising earnings, addressing potential diligence issues in advance, and strengthening areas that may present risk.

The second phase is a focused execution phase. Rather than broad outreach, the business is presented to a select group of credible acquirers within a trusted network who have both the strategic intent and financial capacity to transact.

This targeted approach improves the quality of engagement and increases the probability of a successful outcome.

A More Balanced Perspective

The lower-middle market does not lack quality. It requires context.

While these businesses may not always exhibit high-growth characteristics, they often deliver consistency, resilience, and dependable cash generation.

For many acquirers, this profile represents a compelling opportunity rather than a compromise.

For business owners, the challenge is ensuring that this value is recognised and realised.

How Kensington Capital Supports This Segment

Navigating this part of the market requires more than a conventional process. It requires a practical understanding of how these businesses operate, how value is assessed, and how transactions are actually executed in this segment.

Our focus is on working closely with business owners and stakeholders to bridge the gap between underlying value and market perception.

This begins with a detailed appraisal of the business, including a clear view of normalised earnings, operational structure, and potential areas of concern from a buyer’s perspective. The objective is to ensure that the business is properly understood before it is introduced to the market.

From there, we support a structured and focused process that prioritises engagement with credible buyers. Rather than pursuing broad and often inefficient outreach, we focus on a select group of acquirers who are aligned in terms of strategy, experience, and capacity to transact.

For sellers, this results in a more considered and less disruptive process. Management time is preserved, unnecessary complexity is avoided, and discussions are centred on parties who can move with intent.

For buyers, it provides access to opportunities that have been thoughtfully prepared and clearly presented, allowing for more efficient evaluation and execution.

Having advised on transactions in this segment, we recognise that each business requires a tailored approach. However, where the fundamentals are sound, and where the process is handled with the appropriate level of discipline, outcomes can be materially improved.

An Underserved Segment, A Meaningful Opportunity

This segment of the market has historically been underserved within the advisory landscape. Yet it represents a significant opportunity for both buyers and sellers when approached correctly.

Our experience has shown that with the right preparation, clear positioning, and a disciplined process, businesses in this range can achieve outcomes that more accurately reflect their underlying value.

Not every business will be ready immediately. However, where the fundamentals are strong, the opportunity to unlock value is real.

And increasingly, it is a segment that warrants closer attention.

In the lower-middle market, value is rarely lost. It is simply not always seen.

The 5 Mistakes Sellers Make in the South African Mid-Market

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The 5 Mistakes Sellers Make in the South African Mid-Market

Selling a mid-market business in South Africa is not simply a transaction, it is a process shaped by preparation, positioning, and judgement.

Across recent transactions, a consistent set of patterns continues to emerge. Underwhelming outcomes are rarely driven by market conditions alone. More often, they reflect avoidable missteps in how businesses are prepared, positioned, and taken to market.

This article highlights five of the most common based on our experience and observation.

 

  1. Inadequate Preparation

Preparation remains one of the most persistent pressure points in mid-market transactions.

Businesses are often brought to market with incomplete or inconsistently presented financial information. Supporting documentation is not centrally organised, slowing diligence and eroding buyer confidence. In many cases, the business remains heavily reliant on the owner, with limited operational independence.

Unresolved compliance matters, whether tax, labour, or B-BBEE, introduce additional friction at precisely the point where certainty is most important.

Outcome: Buyers price in risk, or walk away entirely.

 

  1. Unrealistic Valuation and Emotional Attachment.

Valuation is where expectation and reality most frequently diverge.

Seller expectations are often anchored to invested capital or future aspirations, rather than current, supportable earnings. In practice, buyers remain disciplined, particularly in the South African mid-market, where multiples are highly sensitive to risk, scale, and resilience (typically in the range of ~2.2x–3.6x EBITDA).

Macroeconomic conditions, interest rates, consumer demand, and ongoing energy constraints, further influence both appetite and pricing.

Outcome: Processes lose momentum, credibility weakens, and transactions fail to convert.

 

  1. Weak Deal Process

Transaction outcomes are highly sensitive to how the process is structured and managed.

Running a bilateral process with a single buyer limits competitive tension and reduces negotiating leverage. At the same time, an overemphasis on headline price often obscures the importance of deal structure, particularly earnouts, escrows, and conditionality.

In some instances, processes advance before diligence is sufficiently progressed, creating exposure to later renegotiation.

Outcome: Leverage shifts progressively toward the buyer, particularly in later stages of the transaction.

 

  1. Ignoring South African Market Realities

In the South African context, operating realities are central to value, not peripheral.

Key-person dependency remains a consistent concern for buyers. Operational resilience—particularly in relation to energy supply and logistics, is closely scrutinised. Regulatory considerations, including the Competition Act and Companies Act, can introduce timing and execution risk if not proactively managed.

These factors are not theoretical, they are actively interrogated during diligence and directly influence both valuation and deal structure.

Outcome: Perceived risk increases, often reflected in pricing adjustments or withdrawal.

 

  1. Ineffective Advisory Support

The choice and role of advisors materially influence transaction outcomes.

Processes supported by generalist or misaligned advisors often lack structure, coordination, and momentum. In contrast, experienced M&A advisors shape positioning, manage process dynamics, and maintain competitive tension throughout.

The difference is rarely visible at the outset, but becomes clear in execution and, ultimately, in outcome.

Outcome: Reduced certainty, suboptimal pricing, or failed transactions.

 

The Bottom Line

Across transactions, these challenges are common—but they are avoidable.

Stronger outcomes consistently reflect:

  • Early, deliberate preparation (typically 6–18 months in advance)
  • Alignment between expectations and market reality
  • A structured and well-managed process
  • Clear articulation of risk and operational resilience
  • The involvement of experienced, aligned advisors

In practice, the absence of these factors often only becomes evident during diligence—when value is already at risk.

 

How Kensington Capital Supports Sellers

At Kensington Capital, we support founders and shareholders in navigating these dynamics.

Our focus is on ensuring businesses are well positioned, processes are well managed, and outcomes reflect both preparation and judgement.

  • We understand the underlying drivers of value in lower mid-market businesses
  • We position businesses commercially and strategically for the right buyer
  • We run focused, competitive processes to preserve leverage and certainty
  • We manage execution to reduce burden on founders while protecting outcomes

The result is a more controlled, efficient, and ultimately more successful transaction process.

 

Structuring Successful M&A Deals in South Africa: Critical Factors for Success

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Essential Insights for Structuring Effective M&A Transactions in SA

Drawing on our experience as a trusted M&A advisor in South Africa, we’ve observed several recurring challenges and critical success factors in deal structuring. In this article, we outline key insights to help stakeholders navigate the intricacies of M&A transactions with greater clarity, precision, and confidence.

Successfully structuring an M&A transaction in South Africa requires an integrated, strategic approach that balances regulatory obligations, commercial objectives, and risk mitigation. Based on our experience advising on cross-sector M&A deals, the following are the most critical structuring considerations stakeholders must evaluate to ensure transactional success.

1. Regulatory Compliance: A Non-Negotiable Foundation

The South African regulatory environment is layered and highly specific. Failure to properly account for applicable laws and sectoral rules can delay, or even derail, a transaction.

  • Competition Law: All notifiable M&A transactions must be submitted to the Competition Commission and, where required, the Competition Tribunal. The thresholds for notification depend on the asset value and turnover of the merging parties. Beyond traditional antitrust concerns, public interest considerations, including employment, local supplier impact and B-BBEE implications are increasingly scrutinised during merger reviews.
  • Exchange Control Regulations: Cross-border transactions require close attention to South African Reserve Bank (SARB) approval processes. Structuring offshore holding vehicles, repatriating dividends, or funding acquisitions with foreign debt all require early-stage planning to remain compliant with prevailing exchange control policies.
  • Broad-Based Black Economic Empowerment (B-BBEE): In regulated sectors (e.g., mining, financial services, telecoms), M&A deal structures must align with B-BBEE ownership targets to preserve or enhance scorecard ratings. The implications of changing ownership or control must be modelled and planned for meticulously in the transaction structuring phase.

2. Tax Efficiency: Structuring with the Bottom Line in Mind

Poorly structured deals can result in unintended tax leakage and materially affect transaction value. Early involvement of tax advisors is essential to shape the structure and commercial terms. We partner with experienced service providers such as Collop Tax Collective and Webber Wentzel to determine the most tax appropriate transaction structure.

  • Capital Gains Tax (CGT): The disposal of shares or assets may trigger CGT, which must be calculated and planned for in the context of the transaction type and parties involved.
  • Dividends Tax: The manner in which profits are distributed post-transaction, must take into account withholding taxes.
  • Transfer Duty: Acquisitions involving immovable property may attract transfer duty, unless exempted (e.g., asset-for-share transactions under certain tax rollover provisions).
  • VAT Considerations: The VAT treatment of asset sales versus share sales differs significantly. Particular care is required in identifying whether the transaction qualifies as a “going concern” for VAT purposes.
  • Tax Rollover Relief: Sections 42, 45, and 47 of the Income Tax Act provide for tax-neutral rollovers in certain restructurings. When applicable, these provisions can help preserve value but they must be applied with precision and supported by proper documentation and commercial rationale.

3. Choice of Transaction Type: Asset vs Share Deals

The form of the transaction is fundamental and impacts virtually every aspect of the deal.

  • Share Deals: Typically simpler to implement and attractive to sellers (who prefer capital gains treatment), share sales transfer ownership of the company as a going concern. However, they come with heightened risk for buyers, particularly around latent or contingent liabilities, historical compliance, and legacy contracts.
  • Asset Deals: These provide more flexibility for buyers to “cherry-pick” specific assets and exclude unwanted liabilities. However, they are often more complex and may trigger higher tax, regulatory, and contractual obligations such as the need to novate agreements or obtain third-party consents.

Dealmaking strategy must weigh tax, legal exposure, consent requirements, and post-closing integration when selecting the optimal structure.

4. Due Diligence: Identifying Value and Risk Early

Thorough due diligence remains one of the most decisive phases of any M&A transaction. It not only informs valuation and risk allocation but can materially influence deal structure.

  • Legal: Review of corporate authorities, key contracts, compliance with laws, ongoing litigation, and IP ownership.
  • Financial: Analysis of historic and forecasted performance, working capital requirements, and tax exposures.
  • Operational: Evaluation of supply chains, major customer dependencies, internal controls, and management capability.
  • Environmental: Especially relevant in mining, agriculture, and industrial sectors, where environmental liabilities can be substantial.

We engage reputable legal, tax, and financial advisors such as EY-Parthenon ENS Deloitte to ensure a comprehensive due diligence, risk assessment and targeted findings that can be reflected in deal terms (e.g., indemnities, price adjustments, or conditions precedent).

5. Valuation and Funding: Aligning Expectations and Resources

Valuation must be defensible and aligned with the transaction structure and funding model.

  • Valuation Techniques: Discounted Cash Flow (DCF), Comparable Company Analysis, Precedent Transactions, and Net Asset Value (NAV) are commonly used, often in combination.
  • Consideration Structure: Deals may be settled in cash, shares, or through structured mechanisms such as earn-outs, vendor financing, or deferred payments. The mix should align commercial goals, risk-sharing, and funding constraints.
  • Financing Strategy: Early engagement with financiers is critical. Through early engagement. financiers are able to evaluate the deal timeously to determine Credit appetite to fund the transaction.

6. Warranties, Indemnities, and Escrow Mechanisms

Risk allocation in M&A is often formalised through carefully drafted contractual protections.

  • Warranties and Representations: These should be tailored to reflect known risks and the outcome of due diligence. They provide a recourse mechanism for the buyer post-closing.
  • Indemnities: Used to cover identified risks e.g., specific tax liabilities, litigation, or environmental obligations.
  • Escrow and Retention Accounts: Common in South African transactions to manage risk around deferred claims and incentivise post-closing cooperation by all parties.

7. Stakeholder Management: Aligning the Moving Parts

Successful M&A deals depend as much on managing people and perceptions as they do on structuring.

  • Regulators and Approvals: Engaging with regulators (e.g., Competition Commission, SARB, ICASA) early and transparently often accelerates approval timelines.
  • Unions and Employees: In asset sales, Section 197 of the Labour Relations Act requires the automatic transfer of employees to the buyer on existing terms. Failing to engage early with labour representatives can delay deals or result in post-closing disputes.
  • Shareholders and Boards: Ensuring board and shareholder buy-in is critical. In some cases, Section 112/115 of the Companies Act may require special resolutions, particularly where disposals involve “all or the greater part of the assets or undertaking” of the company.

Conclusion

M&A in South Africa is a highly specialised exercise requiring more than just transactional know-how, it demands a multidisciplinary approach, local insight, and proactive stakeholder engagement. Successfully structuring an M&A transaction in South Africa requires more than a standard checklist approach. It calls for strategic foresight, alignment among key stakeholders, and meticulous planning throughout the deal lifecycle.

By understanding the nuances of the local regulatory environment, leveraging appropriate structuring mechanisms, and proactively identifying potential challenges, stakeholders can position themselves to unlock long-term value and ensure sustainable transaction success. As advisors, we remain committed to helping clients navigate this complexity with clarity and confidence.

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#kensingtoncapital #MergersAndAcquisitions #CorporateFinance DealMakers SA Kensington Capital

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Divestment Readiness: A Critical but Often Overlooked Component of the M&A Lifecycle

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As part of our ongoing thought leadership series on mergers and acquisitions (M&A), this article examines a frequently neglected — but strategically vital — element of the deal lifecycle: divestment readiness. Often underestimated or bypassed due to time pressures, inadequate planning, or insufficient advisory support, this phase is instrumental in driving both process efficiency and transaction value.

At Kensington Capital, we have advised on numerous transactions across sectors, jurisdictions, and deal sizes. Regardless of scale or complexity, one recurring theme stands out: insufficient upfront preparation continues to hinder optimal outcomes for sellers.

Slowing Down to Accelerate Value

Our consistent counsel to clients is simple but counterintuitive: slow down at the outset. Robust planning and early actions will unlock speed, value, and control later in the process. Rushing into market without adequate preparation significantly increases the likelihood of valuation erosion, process fatigue, or even transaction failure.

Our divestment readiness framework is designed to ensure that both the business and its leadership are fully prepared — financially, operationally, and strategically — prior to initiating a sale process or approaching potential acquirers.

What Does Effective Preparation Entail?

Many sale processes are prematurely initiated, often in response to opportunistic buyer interest or a desire to capitalise on perceived market timing. We typically advocate for a dedicated 8–12 week preparation window, during which the business and its management team undertake targeted readiness initiatives.

Key elements include:

  • Robust discussions with management to unpack strategic objectives
  • Internal financial (model) preparation
  • Stakeholder alignment on valuation expectations
  • Execution of a robust quality of earnings (QoE) analysis
  • Development of marketing materials
  • Preliminary buyer mapping and soft market soundings

Quality of Earnings: Far More Than Just EBITDA

A QoE assessment is not a mechanical calculation of EBITDA. It is a structured, in-depth interrogation of the company’s earnings profile — typically involving direct engagement with management — to isolate adjustments that more accurately reflect sustainable operating performance.

Such adjustments often include:

  • Normalisations: Removing non-recurring, exceptional, or discretionary items
  • Add-backs: Reinstating owner-related or personal expenditures
  • Deductions: Excluding one-off income streams or gains unrelated to operations

This exercise ensures that reported earnings are an authentic representation of the business’s core profitability — essential for credible valuation and investor confidence.

Why Normalisation of Earnings Matters

1. Accurate Benchmarking

Normalised financials allow for meaningful comparison—either against peer businesses or historical performance — by eliminating distortive items.

2. Valuation Integrity

Adjusted EBITDA is often the primary basis for valuation discussions. Clear, defensible figures protect the seller’s position during negotiations.

3. Buyer Confidence

Transparency in earnings builds trust with potential acquirers, reducing diligence friction and enhancing perceived deal quality.

Typical Adjustments in QoE Analysis

A. Add-backs (increase EBITDA):

  • One-time restructuring or legal costs
  • Owner salaries, non-arm’s-length compensation
  • Non-business-related travel or discretionary spend

B. Deductions (decrease EBITDA):

  • Non-core income (e.g., sale of assets, subsidies, grants)
  • Volume-based rebates or discounts unlikely to continue
  • Revenue unrelated to recurring operations

C.     Other critical adjustments may include:

  • Rent adjustments where below or above market
  • Removal of capital expenditure incorrectly expensed
  • Reclassification of “lifestyle” expenses in founder-led businesses

The Importance of Vendor Due Diligence (VDD)

For more complex or larger-scale transactions, we frequently recommend conducting Vendor Due Diligence (VDD). Unlike traditional diligence led by the buyer, VDD is initiated by the seller prior to going to market and covers financial, tax, and legal domains.

The benefits are two-fold:

  • Risk mitigation: Identifies potential red flags early, enabling remediation or expectation management
  • Process efficiency: Reduces surprises, compresses buyer diligence timelines, and builds credibility

In some cases, VDD has led to a prudent pause in the sale process — saving clients significant advisory costs and protecting transaction value.

High-Quality Marketing Materials: More Than Just a Teaser

Another area often underestimated is the quality and timing of marketing deliverables. We routinely observe sellers launching with only an investment teaser — a high-level document — while delaying the delivery of the Information Memorandum (IM). This gap can stall momentum and erode buyer interest.

Professionally prepared, well-sequenced materials will:

  • Set the tone for the process
  • Reflect management’s professionalism and readiness
  • Influence the quality and seriousness of bidder engagement

The Bidders List: Precision Over Volume

One of the most critical, yet frequently mismanaged, components of the sale process is the preparation of the bidders list. Too often, we encounter generic compilations — industry directories or investor databases repackaged as buyer targets.

We take a more rigorous approach:

  • Strategic workshops with management
  • Confidential soft soundings within our network
  • Data-driven filtering using platforms like Capital IQ or Bloomberg
  • Alignment of buyer profiles with strategic rationale and capital appetite

A high-quality bidders list is curated, confidential, and credible — not a numbers game.

Why Rushing to Market Is Risky

Launching a sale process without undergoing proper divestment readiness introduces significant risks:

  • Valuation compression due to under-preparedness
  • Management distraction and deal fatigue
  • Loss of buyer confidence
  • In worst cases, failed processes and reputational damage

A business exit is often the most significant financial event in a founder’s or owner’s career. After years — sometimes decades — of value creation, this milestone deserves strategic patience, professional discipline, and meticulous execution.

Conclusion: Preparation Is Not a Delay — It’s a Strategy

Divestment readiness is not a nice-to-have — it is a strategic imperative. It underpins valuation, safeguards credibility, and ensures that a transaction process is executed with confidence and control.

As advisors, our mandate is to help clients maximise value and minimise risk. In our experience, the best way to do that is to begin not with the sale itself, but with readiness for the sale.

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#kensingtoncapital #MergersAndAcquisitions #CorporateFinance #Divestments #Repost #TheUpsideOfExperience

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