Trends in Middle Market M&A
Posted on 03.20.17
By Amy R. Menefee, CPA, CFE, Business Assurance & Advisory Services Senior Manager | M&A Team
We saw a reasonably active M&A market during 2016 and this is continuing in 2017. The activity is led by demand from acquirers, particularly strategic buyers. Private equity and institutional buyers who are highly motivated and disciplined, with a limited time horizon are adding to the demand. Bank debt is also readily available. This is the perfect storm for high multiples and attractive valuations. This is expected to continue as there is a significant amount of uninvested capital.
This is especially true in the middle market. The middle market in the United States includes nearly 200,000 businesses with annual revenue ranging from $10 million to $1 billion. This sector of the economy contributes more than $10 trillion dollars in annual revenue and is responsible for approximately one-third of all jobs in the United States. The middle market ended 2016 with high job creation and revenue growth.
According to the National Center for the Middle Market Q4 2016 Indicator Survey, middle market executives see increased deal-making in 2017 with 42% saying they will introduce a new product or service, 41% saying they will expand into new domestic markets, 25% saying they will make an acquisition and 25% saying they will add a new plant or facility in the next twelve months. When asked what challenges they see as most critical to deal-making in the next 12 months, the top concerns were business and staffing.
Business challenges include improving/maintaining working capital, and the effect of regulation and the political/economic landscape.
Improving Working Capital
The challenge of improving working capital can be addressed by use of some basic working capital management techniques. For example, companies can collaborate with customers to help them plan inventory requirements more efficiently and, if possible, align production with consumption. Another technique is to improve receivable collections by implementing effective cash collection procedures and ensuring customers understand and are familiar with payment terms. Strong receivable collection processes may include incentivizing staff to minimize accounts receivable over 60 days, and rewarding those employees who collect accounts receivable within the agreed upon payment terms.
Effect of Regulation and Political/Economic Landscape
Regulation and political landscape is much less controllable and includes challenges sparked by increasing interest rates, decreased availability of senior debt and the change in the political administration, who is expected to address tax reform and healthcare regulations, which can create uncertainty.
Staffing concerns include:
- Availability of needed talent
- Retention of existing talent
- Ability to forecast talent needs
Based on the National Center for the Middle Market Survey, some areas that middle market executives agree are important but need improvement are succession plans for key employees, identifying and developing employees with high potential, and identifying skills gaps now and in the future. Some ways companies are successfully addressing these talent issues include aligning the strategy for talent with the strategic plan of the business, ensuring owners and executives are leading by example, and building human resource practices to guide talent planning.
Middle Market Outlook
The middle market is a significant driver of the economy in the United States and the outlook for growth is highly positive. Mergers and acquisitions can provide middle market companies with a way to accelerate growth. As the middle market continues to succeed it is important to recognize its contribution to the economy.