Hundreds of millions of dollars are sitting in the pockets of investment fund managers. Their favored targets: midsize companies that are big enough to be worth the effort, but small enough to buy (or buy into) without breaking the bank. As a result, deal valuations have never been higher.
It’s a seller’s market. That carries perils for buyers, particularly “strategic buyers,” where individual companies compete with deep-pocketed investment funds (financial buyers) for a limited number of opportunities. But there are also risks for sellers.
We track deal activity at the National Center for the Middle Market, and earlier this year, released an in-depth study of M&A best practices. Here are a few key facts:
The dealmaking pace is steady.
Every year, about 20 percent of middle-market companies buy all or part of another outfit and about 5 percent sell all or part of their company. That number hasn’t risen; we see more competition and higher prices, not more deals.
Most buyers and sellers are inexperienced.
Among companies with a transaction in the last three years, 70 percent of buyers and 90 percent of sellers either had never done a deal or don’t consider M&A integral to their strategy. Indeed, 45 percent weren’t expecting to sell — until an opportunity presented itself. Surprisingly, one out of five buyers didn’t expect to buy, either, but a deal came along that they couldn’t resist.
M&A is important for companies that do it.
Sixty percent of acquirers say that M&A is very or critically important to their growth strategy. They expect it to produce more than a quarter of their revenue growth.
So, 25 percent of companies, every year, make a deal, but most executives aren’t experts in dealmaking or post-merger integration. How can they raise their game?
1. Get clear about strategy. M&A should be a servant of strategy, not its master. Executives tell the NCMM that “getting the strategy right” is the most confusing part of M&A, perhaps because it can be a game changer, for good or ill.
2. Understand your options. Sellers, in particular, should recognize that transactions come in many varieties. Private equity firms used to insist, almost always, on a controlling interest; these days, more will take a smaller stake or invest at a younger stage.
3. Get your house in order. Leaders should do half a dozen things to get a better deal, whether buying or selling, which also will improve performance today. Clarify governance and decision rights, particularly in family businesses. Make sure your financials are shipshape. Beef up the management accounting, too (budgets, goals and the tracking of key performance indicators). Modernize IT and cybersecurity. Document all processes. Tighten your working capital management (payables, inventory and receivables). And, critically, take steps to secure key staff members.
4. Strengthen your network of CEOs in your industry and advisers. Your lawyer might not have M&A experience. You might not know any investment bankers. Have strategic conversations with your banker, auditor and tax adviser. Then, when opportunity knocks, you’re able to answer.
To read the report, visit http://bit.ly/MiddleMarketCenter_MAreport
Thomas A. Stewart is the executive director of National Center for the Middle Market, the leading source for knowledge, leadership and research on midsized companies, based at the Fisher College of Business at The Ohio State University. Thomas is an influential thought leader on global management issues and ideas — an internationally recognized editor and publisher, authority on intellectual capital and knowledge management, and a best-selling author.
