Core Underwriting Factors for Lower Middle Market Companies – Being in the family office environment means I am exposed to companies on a daily basis.  I get a lot of enjoyment out of learning about companies and what makes them unique. All companies experience various phases whether they are trying to reach the next level of growth, a period of stagnation, or going through some distress. I see them all throughout the week.

Looking at any of these businesses begins with the same question.

Does the business make sense?

It is the simple question that most people overlook.

Let’s look at the business model…

(1) What is the purpose of the business and what important need is the business serving?

This is one of the reasons I prefer to stick to the core economic driving businesses.  This is a point that many of my friends and colleagues within the family office and private investment environment emphasize as well.

(2) How does the business scale to the next level? Is there a continuity within the model that allows the business to flow naturally into the coming years ahead and reach next levels of success?

(3) I like to look at the people behind the business.  The underpinning of the business remains the day to day management and people working on the front lines.  I like to see how passionate they are about their job and their company.  The level of focus on their daily tasks is also another factor I review.

(4) Who are the customers? I make it a priority to speak with people directly responsible for revenue. A business either grows or fades away based on customers.  I like to understand how the current customers value the business and why? I like to understand why the do business with this company and is the unique value this business provides the customer. I also like to understand if there is a notable experience the customers has during their interaction with the business.

(5) Who is the competition and what do they offer?  As I said above, customers are ultimately the engine that makes or breaks a business…so you better understand what other alternatives those customers have in the market and also understand where the industry in general is trending.  What is the experience like for customers who do business with your competition?

Broadly, heard me mention “experience” a few times in the last minute. Let’s not underrate the context of that word.  We live in a world that is trending towards the experience and how you feel in the moment versus the actual product.  Always keep this top of mind when evaluating any business endeavor or better yet as a founder who is trying to attract the right alignment of interest to your business – society is trending in the direction of the experience more so than actual products.

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