Robust growth is a hallmark of the U.S. middle market. Middle market companies, with annual revenues between $10MM and $1B, historically outpace their larger peers in both year-over-year revenue and employment growth, and they consistently make outsized contributions to the GDP and the U.S. job market.
The companies don’t achieve these results by standing still. Rather, as we demonstrated in our
2020 Preparing for Major Business Transition report, organizations in the middle market frequently transition, regularly making moves in leadership, financing, and structure that play a part in fueling their outperformance.
That hasn’t changed over the past two years despite the sharp dips and surges in growth rates brought on by the global pandemic and ensuing recovery. To learn more about middle market business transitions and how they have evolved during and in the aftermath of the pandemic, the National Center for the Middle Market, in partnership with Fifth Third Bank, surveyed 300 middle market companies that experienced transition(s) in the past 24 months or are planning a transition(s) in the next two years.
We found that the global pandemic has not slowed the frequency or altered the drivers of transitions in the middle market. Rather, middle market companies have continued to make numerous transitions both on the buy and sell sides. Furthermore, the drivers for these transitions remain largely the same as they were before the pandemic with growth prospects continuing to be the primary impetus for business change.
Below is a closer look at some of the key findings from our latest data set.
Change has been, and continues to be, in the air for middle market businesses.
According to the middle market executives we surveyed, their businesses have experienced an average of two transitions in the past two years. Leaders anticipate an average of two more changes to come over the next 24 months.
Nearly half of the companies (47%) acquired a division, line of business, or an entire company since mid 2020 while more than half (54%) have plans to do so in the next two years. Sales-related transitions are even more common. Almost two-thirds (64%) of companies experienced a change in chief executive leadership or ownership, such as an equity transfer, employee stock ownership transfer, divestment, or public offering. Approximately seven out of 10 companies expect a sales-related transition soon.
Transitions drive expansion and rapid growth.
Business expansion remains the primary impetus for middle market business transitions of all types. Both pre- and post-pandemic, companies cite increasing market share and access to new markets as key reasons for embarking on their transitions. And, the strategy clearly works: companies experiencing transition have opened the door to new customers, new revenues, and new growth.
Almost all (90%) companies that underwent a transition in the past 24 months report that the change led to revenue growth. Nearly four out of five (79%) businesses say that their workforce has grown as a result of the change. Furthermore, the growth has been significant. On average, companies experienced 9.4% revenue growth and 7.1% employment growth in the post transition period. Organizations have similar growth expectations for their future transitions.
Beyond revenue and workforce growth, middle market companies view transitions as the gateway to new technologies, increased efficiencies, new markets, greater share of market, and new offerings, all of which help to propel the growth agendas of these dynamic businesses.
Business transitions are (mostly) positive experiences.
While the pandemic and its aftermath have challenged middle market business leaders in countless ways, the crisis has apparently not hampered satisfaction with business transitions. Our 2020 survey showed that three-quarters of firms experiencing past transition were highly satisfied with the outcome. The results of recent transitions are even more positive: 87% of middle market leaders are extremely satisfied with the outcome of transitions experienced over the past two years. They have high expectations for their future planned transitions as well.
That satisfaction is largely tied to the results. Companies state that they have achieved growth, entered new markets, and built market share. Middle market leaders also report positive perceptions of the transition process itself. They believe their past transitions have been smooth, timely, and relatively easy to execute. Indeed, 81% of middle market companies experiencing a business transition over the past 24 months report that the experience went better than anticipated; more than a third of the companies said it was much better compared to their expectations.
Nevertheless, major change does not come without its fair share of challenges.
The U.S. middle market shows no signs of slowing down its transitionary nature. According to the latest Middle Market Indictor data, a majority of middle market companies have expansionary plans for the next 12 months. For significant proportions of these companies, an acquisition (46%), merger (38%), or new equity investment (52%) will be part of these plans.
While history shows that these transitions are likely to yield positive results, they require middle market leaders to give careful consideration to several key factors. In the next few posts in our business transitions series, we will take a closer look at concerns and challenges involved in transitions including the impact on employees and the increasingly critical role of technology in the business transition landscape.
About the Research
In March 2022, the National Center for the Middle Market, in partnership with Fifth Third Bank, surveyed a group of 300 middle market executives including executives from 150 companies that underwent a business transition in the past 24 months and 150 executives from companies planning a business transition in the next 24 months. The companies surveyed span all middle market industry segments and more than half of the companies are family-owned businesses. The survey sought to understand how middle market companies prepare for and executed business transitions and how the middle market business transition landscape has evolved over the past two years.
About Fifth Third Bank
Fifth Third Bank, National Association, established in 1858, is a diversified financial services company headquartered in Cincinnati, Ohio. Fifth Third is among the largest money managers in the Midwest. It operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Wealth & Asset Management.