The Middle Market Deal-Making Frenzy

Deals in the middle market haven’t increased in recent years. But the amount of competition certainly has. The Middle Market Indicator argues that every year, about 20% of middle market businesses purchase all or a portion of another business. An additional 5% divest or sell. This has been steady since 2015. Some companies are serial deal makers, but the majority are making a deal for only the first or second time.

Despite a steady rate of deals, buzz, and excitement have both reached a frenetic pace. Competition is increasing, producing higher values and faster deals. Here are three key reasons why:

  1. An excellent economy means greater confidence. This brings more players to the table. Record-high company profits, ready availability of financing, and access to quick capital give more companies the financial ability to invest. Middle Market Indicator data suggests that executive confidence is extremely high. Most companies want to invest their extra money. So potential buyers roughly match the number of potential targets, causing valuations to rise and competition to increase. The multiple of EBITDA has increased from 8.8x in 2013 to 10.3x.
  2. Strategic M&A has become more important. More middle market leaders, particularly those at the helm of larger businesses, are seeking M&A opportunities for strategic reasons. In fact, research suggests that industry changes, not economic conditions, are the single most significant reason companies pursue M&A. In many industries, consolidation of suppliers and competitors emphasizes the need for targeted acquisitions. Scale offers critical advantage and a chance for growth—especially when there are limited chances for organic growth. M&A is often the fastest route to new capabilities and new customers.
  3. Large quantities of private equity funding are looking for a target. According to research from Thomson Reuters, there was $200 billion in PE fund investments in 2017—up from $130 billion raised the year before. In 2018, the figure will only grow. Three in four investors say they want to source deals from the middle market. The demand is so high that investment funds are now putting a higher percentage of equity into new deals.

Today, deal-making capabilities are more critical than ever. Strategic and financial buyers are willing to be aggressive, and the rewards that sellers can reap are immense. The key is to be deal-ready when an opportunity presents itself. The very strategies that can drive growth and profits are the same strategies that can increase your attractiveness as a deal target.

Even if you don’t think you want to be acquired, you never know when an enticing opportunity might appear. Get ready for it now. Get your books in order. Increase profits. Improve customer concentration. There may never again be a deal-making climate quite like the one we’re seeing today.

About Edgemont Capital Partners
Edgemont Capital Partners is a specialist healthcare investment banking firm providing the highest level of mergers and acquisitions advisory services founder-owned and entrepreneur-run healthcare and life sciences companies in the lower middle and middle markets. Our world class transaction expertise is a result of our extensive and proven track record of success. We have advised on over 150 transactions representing more than $60 billion in combined value.