The mega deals, the deals above $2.5 billion, are back in vogue. And while they provide private equity firm service providers, like us, with good work, the real game is still in the smaller deals, particularly those less than $250 million. Small deals, those under $50 million, are the net winner in terms of volume, but the volume of $50-$250 million deals is catching up and is almost even with the number of <$50million. According to research from Pitchbook, these smaller deals account for a combined 72% to 88% of the market in any given year as measured by the quantity of deals.

If you consider the actual cost of due diligence, the resource outlay is fairly similar whether the purchase is $175 million or $25 million. Now, what you actually pay for transactions services won’t be, but as a provider, the dirty little secret is, it is just as intensive either way. Which is why smaller companies, those under $100 million annual revenue, have such difficulty finding skilled transaction vendors willing to work with them. Smaller corporate clients may have challenges identifying appropriate service providers in order to dress up for sale.

This is good news for private equity firms on the hunt.

Family enterprises are looking particularly vulnerable to the impending tax law changes. Now is a great time to pull together a dominant industry position. Happy hunting.

Recession proof your business this summer by unlocking your cash reserves. Start shopping! Now really is an excellent time to buy. Average and mediocre private equity firms are on the sidelines because they depend on the fast food of capital, cheap debt. Banks are skittish and recent deals are not unlocking their value at quite the rate some investors would like. Even the Financial Times mentioned that a number of PE firms would be returning capital to investors (6/30/08 FT) because they cannot meet return targets.

This creates the perfect opportunity for corporate investors to snap up some delightful complements. We are seeing interest in corporate entities rounding out their client interaction portfolio which is to say, making their communities tighter.

For the local Dental Clinics this means purchasing the local community user group that has 10,000 active and 20,000 moderately active users (interact once-a-month). While it is not unusual to see vertical integration, what is different now is the flavor of that integration. These are independent users bound only by an interest in being terrified by Dentists. The Dental Clinics get the obvious benefits of “listening in on user conversations” to enhance, reposition their products and advertising at cost, but the abstract benefit of expansion is much more real with a user group to lead the way.

Given that a number of these users are not as true local as would be necessary for a Dental Practice, the Clinics are using this (super cheap!) acquisition to open additional not-currently-local markets. These additional clinics will open in early 2009 and already have 2 month waiting lists in 4 of the 5 new markets. The doors will open cash flow positive. Not a bad gig if you can get it.

So open your FCF to acquisitions that can bring you closer to your best customers. Snuggle right up to them. The deals aren’t cheap in most markets but the crazy auction format has ceded to a more reasonable due diligence style.

I like deals that complement your core offering. If your customer wants it anyway, why not benefit from providing it? Enjoy shopping through late-October.