As large corporate M&A cools off after a peak of activity last year – in part because of buyers discouraged by high price tags and increasing economic uncertainty – attention is turning toward the middle-market to get deals done. Indeed, 70% of wealth in the U.S. sits in closely held middle-market businesses, according to Forbes.
And the market is ripe for the picking: SunTrust’s Annual 2016 Business Pulse Survey reports that 36% of middle-market businesses are looking to grow through M&A, compared to 25% last year.
Positive signs in the middle-market stoke investor confidence. According to Golub Capital’s Middle Market Report, private middle-market companies increased revenues by 9% and earnings by 5% year-over-year during the first two months of 2016. This is a significant increase from 7% and 2% growth, respectively, in the fourth quarter of 2015. Bear in mind that private middle-market companies are posting these healthy numbers in the face of rising labor costs and a stronger U.S. dollar.
Major banks and large corporations are noticing the trend. According to the Greater Baton Rouge Business Report, Wells Fargo is expanding its middle-market commercial banking presence. Google is gearing its acquisition strategy towards acquiring more middle-market businesses that provide enterprise services to the expanding market. It makes sense: if the difficult economy is hindering large corporate M&A, where does the activity flow to? Downstream to the middle-market.
The active middle-market is also favoring sellers. A Middle-Market Survey published by Seyfarth Shaw LLP found that buyers are extending themselves to cater to sellers. The survey identified several factors that are creating favorable deal terms for sellers. Namely, buyers are:
- Differentiating themselves by taking on more risk in their acquisition agreements.
- Offering more aggressive contractual terms.
- Purchasing representation and warranty insurance to limit post-closing liabilities of sellers.
Large corporate M&A is losing momentum, but things are heating up down market. Now is a great time to be a seller, that is, if you’re in the middle-market.