Last week the Wall Street Journal hosted the Middle Market Network to discuss issues relevant to middle market firms in the US. The good news is that middle market companies are getting healthier. With an increase in M&A activity and a boom in the construction industry, middle market businesses are growing and CEO confidence is high.

However, middle market companies still face challenges due to the global economic environment, disruption from technology, and industry and demographic shifts. Below are some of the issues that were discussed along with our commentary:

1. M&A

Middle market activity in 2016 was strong and we can expect robust activity to continue. Debt financing is still relatively inexpensive and the prospect of tax reform is also an incentive for deals. The demographic shift with baby boomers entering retirement and selling their firms also continues to drive activity.

2. Staffing

About half of middle market firms say a lack of talent at all levels impedes growth, according to Thomas Stewart of the National Center for the Middle Market.

Once recruited, middle market companies also struggle to keep employee engaged and satisfied on the job. Stewart suggests on the job training and collaboration with higher education so students learn the skills necessary for joining the workforce.

Another way middle market companies can fill this gap is by acquiring another company for key employees. Also known as an “acqui-hire,” this practice is commonly seen with technology startups, but can be applied to organizations of any size. In fact, identifying “star employees” is an essential part of due diligence.

3. Succession planning

Many middle market businesses have no plan for succession and those that do often fail to execute them.

Succession plans must be developed long before an owner exits in order to ensure the longevity of a company. It takes time to identify and cultivate individuals that can lead the company. Business owners should consider their goals and if anyone is capable and ready to take over. When no succession plan has been put in place, selling can also be option. For strategic acquirers, this is an opportunity to develop a persuasive offer for the company to sell to you. Determine what factors including, price and personal drivers would make selling to you more attractive how it will meet the owner’s goals.

4. Technology

Automation and technology are here to stay and middle market firms need to grasp this reality and act on it. Unlike large corporations who have the money to invest in the latest technology, many middle market companies have not embraced this change either due to lack of resources of fear from works that they will lose their jobs to robots. Marco Annunziata, GE’s Chief Economist, had a few interesting comments, noting “There will always be a human component” to technology. Whether or not this is true, technology has and will continue to dramatically change business.

Cybersecurity is another major concern and only 45% of middle market companies have an up-to-date defense plan. As the world becomes more digital, many companies find they are ill-equipped to deal with data breaches and the threat of hackers. Middle market companies may think cyberattacks only happen to large corporations like Target and Yahoo!, but the reality is no business is too small for hackers to target.

5. Healthcare

Changes in healthcare policy is a major concern for middle market businesses. 74% of firms attending said it would affect their business. With so much uncertainty, navigating the changes and planning for the future has become increasingly difficult.

 

Walmart will acquire web retailer Jet.com for $3.3 billion in order to boost its online business. The deal is the largest ever purchase of U.S. e-commerce startup. While Walmart has plenty of bricks and mortar stores, the company has struggled to grow its online business. Walmart knows it needs to be competitive with Amazon who has branched out into selling groceries and other consumer goods traditionally bought at stores. It’s no secret that e-commerce is on the rise. We now have a whole generation of shoppers who grew up with the internet and are very comfortable with and may even prefer buying ordinary staples online instead of going to a physical store.

There are a couple of interesting points to note about this transaction from an integration standpoint.

1. Keeping Key Employees

It’s important to assess key employees at the seller’s organization and put plans in place to keep them post-closing. Keep in mind, the best person for the job might be in the seller’s organization. Jet founder Marc Lore will take a senior leadership position in Walmart’s e-commerce division while Walmart’s top online executive Neil Ashe will leave. Part of the reason for acquisition is the expertise of a star player who will help Walmart be more effective at e-commerce.

2. Adapting to the Seller

The amount of equity you acquire in a company does not indicate what you should do from an integration standpoint. Just because you acquire 100% of a company does not mean you should force the seller to comply with all of your practices.

It would not make much sense if, after the acquisition, Walmart expected Jet to comply with the Walmart way of doing things. Why did Walmart acquire Jet in the first place? They wanted the knowledge and expertise. Walmart plans to keep Jet.com and Walmart.com operating as separate websites. It also plans to integrate Jet’s software into its own website.

A critical component to being successful at integration is understanding what level of integration you need. You must be disciplined and understand why you are buying the company whether is for their expertise, culture, members, etc. Whatever the case may be, keep in mind you may need to integrate your organization to the seller’s.  This sets the tone for the way you will be thinking about integration. Don’t assume that everything the seller does needs to change.

Photo Credit Mike Mozart via Flickr cc

“The best opportunities are the ones we’re pursuing and not the other way around.”

This comment in The Wall Street Journal from Smadar Levi, CFO of MyHeritage.com, is one I wholeheartedly agree with.

She is quoted in an article about the growing number of startups seeking to be acquired. With fewer financing options available to late-stage startups, many faced with the choice of closing shop or being acquired are choosing the latter.

For the buyers, a for-sale acquisition might seem like a dream come true. An opportunity has just landed in your lap! You don’t have to search for the company and there’s no need to convince the owners to sell. It seems like half the work is done for you already.

While a for-sale acquisition may sometimes be the right answer for your business, I’ve found that often it brings more trouble than solutions. The acquisitions you proactively seek out are more likely to match your strategic criteria than the opportunities that come to you.

The key word here is strategy, something many leaders do not consider when evaluating for-sale acquisitions.  They allow themselves to simply react to the opportunities presented to them without considering the big picture. For those who do evaluate these opportunities against their acquisition strategy, many find for-sale deals do not match their criteria.

On the other hand, a proactive approach to M&A forces leaders to review their business strategy before considering acquisition. After all, before you can search for companies that meet your strategic need, you have to know what it is.

I am not suggesting that for-sale acquisitions can never be strategic or successful. But in my experience, you will have the most success by actively searching for companies that meet your strategic need.  Acquisition is a significant endeavor, and, while many opportunities exist, the challenge lies in finding the best opportunity for your business. I believe a proactive, strategic approach to acquisition will give you the highest chances of success.