M&A Operations in the Spanish Mid-Market: How to Add Value to Family Businesses

During 2024, alongside APD and in collaboration with financial entities such as Santander and Renta4, and under the title: The Value of Your Company, at UHY Fay & Co we have held several dynamic events with a very practical approach on the purchase and sale of companies. This has allowed us to see firsthand that the mergers and acquisitions (M&A) market in Spain has experienced growing dynamism in recent years, especially in the mid-market segment. This niche, made up mainly of medium-sized family businesses, represents an essential part of the Spanish business fabric. At the beginning of 2025, and with the aim of continuing this series of events, we will keep exploring how these operations can add value to family business, the economic criteria of interest for buyers, and the importance of having specialized advisors.

But what is the mid-market, and why is it relevant?
The mid-market segment refers to companies with annual revenues between 10 and 100 million euros and EBITDA values (earnings before interest, taxes, depreciation, and amortization) typically ranging between 2 and 15 million euros. These companies are often family-owned, with a relatively simple organizational structure and strong roots in their local or regional markets.

In Spain, the mid-market is crucial due to its contribution to the national economy and employment. However, these companies often face challenges related to generational succession, the search for new markets, or digitalization. M&A operations emerge as a strategic solution to overcome these challenges.

Sectors with the Most M&A Activity in 2024
In 2024, certain sectors have shown greater dynamism in the field of mergers and acquisitions:

• Technology and Software: This sector continues to lead M&A activity, driven by the growing demand for digitalization and innovative technological solutions. Startups and established companies in enterprise software, cybersecurity, and artificial intelligence are particularly attractive.
• Healthcare and Biotechnology: The pandemic highlighted the importance of this sector, which remains a top priority for investment funds.

Companies in medical devices, laboratories, and telemedicine services stand out.

• Renewable Energy: With the rise of sustainability policies, companies focused on wind and solar power generation, as well as green hydrogen projects, are attracting great interest.
• Education: Digitalization and online training have driven investment in edtech platforms, specialized academies, and hybrid learning models, drawing investors interested in modernizing the sector.
• Food and Beverages: Especially companies focused on healthy, sustainable, or gourmet products targeting differentiated market niches.
• Logistics and Transportation: The adaptation to e-commerce has skyrocketed the demand for advanced logistics services and last-mile solutions.

But what is a company’s value?
In the context of M&A, a company’s value is often calculated as a multiple of its EBITDA. However, the real value of a company is ultimately the amount a buyer is willing to pay. The multiples applied vary by sector, expected growth, and strategic attractiveness, generally ranging between 6x and 10x EBITDA. To this amount, net financial debt is usually added or subtracted, without applying any multiple to it.

On the other hand, active buyers, such as private equity funds and companies with inorganic growth strategies, tend to set certain minimum interest criteria:

• EBITDA above 2 million euros.
• Compound annual growth rate (CAGR) over 10%.
• Strong competitive position in the market.
• Diversified customer and supplier base.
• Ability to integrate with the buyer’s existing operations.

Companies that meet these requirements become prime targets for investors.

In addition to active buyers, there are other models, such as search funds, which have been gaining popularity in recent years. These are funds created by entrepreneurs looking to acquire and operate a single company. They usually focus on small or medium-sized businesses with stable cash flows and solid margins but in need of management or strategic improvements. Although these companies don’t always meet the criteria of traditional funds, their appeal lies in their growth potential under new leadership.

Another type that can be attractive in certain circumstances is distress funds. These specialize in financially troubled companies or those near bankruptcy. They identify value in undervalued assets or viable markets, focusing on restructuring and recapitalization to restore profitability. Although they take on higher risks, they offer the possibility of significant returns by revitalizing these companies.

How to Add Value in the M&A Process
For a mid-sized family business, participating in an M&A transaction can be transformative. However, it also involves significant risks. Here are some key aspects that can maximize value:

• Strategic Preparation: Before considering a sale or acquisition, it’s crucial to analyze the company’s strengths, weaknesses, and opportunities. Is it ready to be attractive to a buyer? A financial and operational audit can help identify areas for improvement.
• Managing Expectations: Family businesses often have an emotional connection to their operations, which can complicate negotiations. It’s important to establish a reasonable valuation and clear objectives from the start.
• Identifying the Right Buyer: Not all buyers are the same. A strategic investor can bring significant synergies, while a private equity fund will focus on optimizing profitability in the short to medium term.
• Negotiating the Deal: Elements like price structure (initial payment, earn-outs, etc.), contractual guarantees, and non-compete agreements must be carefully evaluated.

The Key Role of the Professional Advisor
The complexity of M&A transactions makes the role of a specialized advisor indispensable. An experienced advisor not only acts as an intermediary but also serves as a catalyst to ensure the success of the deal.

What does a professional advisor bring?

1. Market Knowledge: Advisors have privileged access to databases, industry contacts, and market trends, which can make a difference when identifying opportunities.
2. Accurate Valuation: Determining the fair value of a company is both an art and a science. A good advisor ensures that the price reflects the company’s real potential.
3. Customized Strategy: Every company is unique. Advisors design tailored strategies that maximize the chances of success.
4. Process Management: From preparing confidential documents to coordinating due diligence and final negotiations, a good advisor ensures that each stage is carried out efficiently.
5. Risk Mitigation: M&A transactions are full of legal, financial, and operational risks. Advisors help identify and mitigate these risks before they become problems.

Conclusion
The mid-market segment in Spain offers significant opportunities for family businesses seeking to grow, diversify, or address structural challenges. However, maximizing value in an M&A transaction requires preparation, strategy, and, above all, the support of specialized advisors. These professionals not only bring knowledge and experience but also act as guarantors of success, ensuring that the decisions made today generate sustainable benefits in the long term.

Ultimately, a well-managed M&A transaction not only facilitates business continuity under new structures but can also have a positive impact on future growth and sustainability.