Grow or die. Faced with that mantra, roughly 32 percent of upper middle market firms are currently involved in an acquisition, and another 31 percent are open to considering one, according to recent survey results from Citizens Commercial Banking. The survey tracked all types of midsize businesses with revenues ranging from $5 million to $2 billion, and it certainly echoes recent anecdotal M&A activity among VARs and MSPs.
The survey results arrive as large and midsize businesses struggle to drive organic growth. Oracle CEO Mark Hurd reinforced that mindset yesterday during an Oracle CloudWorld gathering in New York. The typical CEO tenure is about 4.5 years, he noted. Faced with no growth or slow growth businesses, those CEOs are under intense pressure to cut costs while also pursuing alternative growth strategies.
Midmarket M&A Survey Findings
That's where M&A enters the conversation -- especially in the midmarket. According to the Citizens Commercial Banking survey findings:
- Fifty-four percent of upper middle market potential buyers say they are more confident today than they have been in the past that growth through outside investment is an appropriate strategy.
- Top concerns among buyers are “inherited liability” and “overpaying for an acquisition.” Smaller middle market firms are also worried about losing key employees during an acquisition, while larger firms are worried about market fluctuations that could impact deal values.
- Eighty-three percent of upper middle market potential sellers report that they have been either extremely (25 percent) or moderately (58 percent) impacted by volatility in the global economy.
- Forty-one percent of upper middle market potential sellers fear a significant financial crisis in the next three years.
- Top reasons for selling are to provide liquidity for owners and to take advantage of current market value. Forty percent of lower middle market owners also cite “fatigue.”
M&A Among VARs, MSPs
Many of those survey findings correlate back to IT service providers. Deal activity among VARs and MSPs has been especially strong in the past year, and valuations for IT service providers also have been strong, according to Paul Dippell, CEO of Service Leadership Inc., a consulting firm that benchmarks channel partners.
Many VAR owners are aging out of the industry, and looking to sell their businesses at reasonable multiples. One recent example likely involves Presidio acquiring Netech, a $300 million Cisco VAR that was family owned.
A pure VAR business likely fetches about 10 cents on the dollar in valuation -- meaning that a $100 million VAR is worth about $10 million in M&A, Service Leadership estimates. Valuations are higher for pure managed services business, which fetch about $1.27 for each dollar of revenue they produce annually. Of course, no service provider is purely a VAR or MSP -- meaning that channel partners need to weigh a range of metrics when calculating valuations.
More M&A Deals Coming
Based purely on demographics, it's clear that M&A activity should remain strong over the next few years -- particularly among smaller businesses where deals should accelerate through 2022, according to Business Renewal Solutions.
That firm states:
"As the Baby Boomer generation approaches retirement age, this number will more than double to more than 500,000 businesses per year. In total, more than 7.7 million business owners will be looking to exit their businesses over the next 10-15 years. Some estimate that these businesses represent over $10 trillion in wealth.”
Bottom line? Midmarket M&A sounds like it will be strong in 2016, and small business M&A should continue strong through 2022.
