The second post in a series based on the research report Middle Market M&A: What Executives and Advisors Need to Know to Make the Most of Mergers & Acquisitions, by the National Center for the Middle Market, this blog post explores the drivers of M&A activity in the middle market among both buyers and sellers.
When a middle market company decides to acquire another business, it’s usually for one reason: growth. The Center’s recent research shows that about 7 out of 10 mid-sized companies that made an acquisition in the past three years did their last deal with this goal in mind, and 60% of companies that participate in M&A consider it a vital part of their growth strategies.
For sellers, it’s a bit more complicated. Of course, cash counts: 80% of sellers said they were looking to monetize their business. But nearly three-quarters (72%) said their most recent sale was about streamlining their focus on the core business and selling off ancillary business units. Half of companies said an owner’s retirement factored into the selling decision.
Decisions to buy and sell can be made for one reason or many. In all cases, however, M&A clearly provides middle market companies with a powerful strategic tool for achieving a variety of objectives. If you’re considering a potential deal now or sometime down the road—or even if you’re not— here are a few things we learned about M&A that are worth keeping in mind:
Acquisitions can account for a significant portion of overall growth. According to the 4th quarter 2017 Middle Market Indicator, inorganic growth accounted for 6.4% of total growth among all growing middle market companies. However, those who have participated in M&A recently see it as playing a much larger role. On average, deal-making companies expect acquisitions to drive 26% of their business’ overall growth. Deals clearly have the potential to change the size and scope of a mid-sized company significantly.
Acquisitions are a powerful way to enter new markets and gain new customers. Nearly 80% of acquiring businesses are strategic about their decisions to buy. They are either always on the lookout for potential opportunities (46%), or they begin a search for a target based on a strategic decision to acquire (33%). What’s behind that decision? The most important consideration is gaining access into new markets and adding to the customer roster: 68% of respondents listed this as one of the top three factors they considered.
Acquisitions can play a role in talent strategy. Beyond acquiring customers, many companies look at acquisitions as a way to acquire people. More than four out of 10 (42%) businesses listed talent acquisition as a top consideration. PE-owned firms and core middle market businesses (annual revenue between $50 and $100 million) are particularly interested in talent.
Sometimes, M&A is purely opportunistic. While the majority of acquisitions and sales begin with strategic intent, on occasion, it’s all about being in the right place at the right time. Specifically, 21% of buyers and 45% of sellers say they responded to an unexpected opportunity. That means it never hurts to pick up the phone and make a call if your business is interested in a specific company. It also suggests that it’s worthwhile to make sure your company is deal-ready, even if you’re not even thinking about a transaction right now.
Learn more about middle market M&A and how good deals are made.
To find out more about the role of M&A in the middle market and how companies can prepare now for potential future deals, download the Center’s full report, Middle Market M&A: What Executives and Advisors Need to Know to Make the Most of Mergers & Acquisitions.
Next in this series
Post 3: Making Your First Deal: 4 Things Executives Wish They Had Known
Others in this series
Post 1: Let’s Make a Deal: 3 Reasons Why the Time Is Ripe for Middle Market M&A
Post 4: Get Deal-Ready: Be Prepared for the Right Opportunity