Middle Market M&A

Middle Market M&A

By Robert St. Germain

November 30, 2018

Business Planning
The National Center for the Middle Market (NCMM), which is a collaboration between The Ohio State University's Fisher College of Business, SunTrust Banks Inc., Grant Thornton LLP, and Cisco Systems, conducted a study in late 2017 that reported on the state of M&A within the middle market. https://rusbank.net
For the reader's frame of reference, the NCMM defines the middle market as both privately and publicly held companies that generate between $10 million and $1 billion in annual revenues, of which, there are approximately 200,000 such companies in the U.S. In aggregate, they generate $10 trillion in annual revenues and account for one-third of private sector GDP and employment.
The stated purpose of this report was "…to inform both middle market executives and their external advisors and consultants in order to facilitate more successful deals in the future." Its findings were quite illuminating:
  1. 60% of study participants said that inorganic growth plays an important role in their company's growth strategy.
  2. Every year, roughly 20% of middle market companies complete an acquisition and about 5% of those companies sell to or merge into another business.
  3. Among companies that had completed a purchase in the previous three years, for 29%, it was their first deal while another 41% had limited previous experience.
  4. Among sellers in the previous three years, for 46%, it was their first deal and only one in 10 companies had significant previous experience with sale transactions.
  5. Middle market leaders said that finding the right target or buyer was one of the most confusing aspects of M&A.
  6. On the front end of an acquisition or sale, 41% of buyers and 43% of sellers found it difficult to assess the value of the business they were buying or selling.

In spite of the above findings, however, the study also found:

  1. Both buying and selling companies tend to rely mostly on their internal executives and top managers when searching for companies to buy or to whom to sell.
  2. Only about a third of buyers consulted an external law firm, and even fewer talked to consultants or investment bankers.
  3. Sellers were even less likely to bring in external advisors as part of their search for the right buyer.

The study did not provide any deal specific details (e.g. transaction prices as a function of a financial metric); but juxtaposing the first set of findings with the second set would lead one to infer that the deals generally referenced in the study were likely sub-optimal in outcome.

That inference comes from the companies' cited paucity of deal making experience, as well as their general avoidance of using outside M&A experts to complement their relatively inexperienced internal resources.

So, one major take-away from this NCMM study is for buyers and sellers to first build a high quality deal team that certainly includes their appropriate insiders, but, importantly, also includes outside experts with deep and current M&A experience. Among those outside M&A experts should be an attorney, a CPA and an investment banker.

The investment banker on the team will add significant value by running a sophisticated buy-side or sell-side process in accordance with expected market protocols. That process will naturally include finding the right target or buyer, as well as assessing the value of the business being bought or sold, which were two of the weaknesses cited in the study when companies used internal resources only.
Investment bankers also add significant value by allowing management to keep their focus on the business while the buy/sell process is run in parallel; and, most importantly, by negotiating on behalf of management the best price and deal terms to optimize deal outcome.