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Let's Make a Deal: Mergers, Acquisitions Key to Middle Market Growth
Ohio Ag Connection - 01/12/2018

New research released today by the National Center for the Middle Market shows that healthy financial conditions are driving increased merger and acquisition activity within middle market companies with 60 percent of survey respondents stating it plays a very important role in their growth strategy.

The survey of 400 strategic decision makers from middle market companies that completed a M&A in the past three years or are highly likely to sell all or part of a company in the next three, revealed that there is a lack of M&A experience within this business sector.

The middle market is an extremely attractive market especially for M&A. Investment funds having nearly $200 billion in capital to invest regularly look to middle market firms to make their deals. Additionally, executives of middle market companies expect the deals they make to drive more than a quarter of their growth.

Despite this activity and the importance of M&A, most MM executives come to the deal table with little direct experience of the process. Of those companies that completed a purchase in the past three years nearly one third (29 percent) were doing a deal for the first time and more than 40 percent had limited previous experience. On the selling side, first timers jumped to 46 percent with only one in 10 companies reporting having significant sales experience.

"Lack of experience with mergers and acquisitions causes middle market executives to underestimate issues that arise when bringing two companies together," said Thomas A. Stewart, Executive Director of the National Center for the Middle Market. "Without undergoing the rigorous planning associated with these transactions, one can experience unpleasant and costly surprises during or after the deal."

According to the data, on the front end of an acquisition or sale more than 40 percent of buyers and 50 percent of sellers find it very to extremely difficult to assess the value of the business they are trying to buy or sell. Post transaction, 44 percent of both buyers and sellers state integration as the major challenge. This includes integration of technology systems, company culture, staff and administrative processes.

One of the reasons middle market companies may be struggling with M&A is the fact that many do not fully leverage external advisors when looking for the right acquisition target or buyer. They tend to rely on internal executives or top managers when seeking companies to buy or sell. The research showed that only one third of buyers looked for targets with help from an external law firm and even fewer talked to consultants or investment bankers. Sellers were even less likely to bring in external advisers in their search for buyers.

"Bringing the right people to the table early in the deal-making process helps to pave the way to a more successful deal, as well as identify potential costly red flags," said NCMM Managing Director Doug Farren. "Objectivity is extremely important when buying or selling a company. Bringing in external help can help to build the right deal team and make smarter decisions."

Every year approximately 20 percent of middle market firms acquire a company and about five percent sell or divest a part of their organization. Careful planning and preparation that starts well in advance of M&A execution can bolster the success of these deals which can typically take approximately three to 12 months to complete. However, the planning horizon should ideally be three to five times as long to give companies time to assemble the right deal team, identify and assess targets, conduct thorough research and put a plan in place for integration post-deal.

With the middle market M&A environment being as competitive as it is, the findings and recommendations from NCMM's research can help executives gain a better understanding of the M&A landscape; identify those areas that deserve careful consideration well in advance of executing a merger, acquisition or sale; and know when and why to bring in expert help.

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