The Emerging Mid-Market in 2018: M&A to the Fore Amid Growing Challenges
In our annual survey in association with the Institute of Directors, we surveyed the views and opinion of IoD members and users of IoD.com.
The results, on the one hand, highlight the difficulties facing CEOs and owners at a low- and emerging mid-market level. However – amid emerging threats and challenges – we are also seeing resilience and a determination to carve out new paths to growth.
And while leaders are in no doubt as to the difficulties that lie ahead, many are finding new and creative routes to the top. In 2018, gaining competitive advantage means working intelligently to make best use of the opportunities and resources at hand – and that includes M&A.
These are our key takeaways from the survey:
Brexit blues setting in…
From a sluggish economy to the uncertainty of Brexit, Britain’s small- and emerging mid-market companies are battling a myriad of challenges.
As emerged from last year’s survey, a weak economy remains the main drag on profit and revenues, attracting 37.4% of responses. More than half (51.2%) of the leaders we canvassed expect conditions in the UK to deteriorate further in 2018.
Meanwhile, 17.9% of respondents already see Brexit as the obstacle in their path. A further 11.4% cite withdrawal from the European Single Market as the biggest future threat to their business, while 13% most fear the repercussions of a ‘no-deal’ outcome.
Which of the following factors has had the main impact on your turnover/profit?
Unsurprisingly, more than two-fifths of respondents (40.3%) report stagnant turnover over the previous 12 months (compared with 37.8% in last year’s survey). A further 7.2% have seen revenues contract.
Profits are also under pressure: a substantial proportion of the executives express either a decline in profitability during 2017 (13.8%) or no significant change (46.3%).
There are other knock-on effects, too. 22% of those surveyed note a critical shortage of skills and labour. Meanwhile, a tight lending environment means fewer than one in four firms rely on bank lending as their primary source on capital. And more than a fifth (20.3%) of the companies profiled suffer from poor cash flow.
A time for innovation
As we move closer towards the March 2019 deadline for EU withdrawal, optimism is beginning to dwindle. Barely a third (34.1%) of survey participants see clear opportunities for growing their business over the coming 12 months – down from 45.9% at this time last year.
Looking ahead at the next 12 months, what best describes your outlook?
Yet only 16.3% express outright pessimism about the future. With a dearth of traditional growth drivers at their disposal, today’s leaders are simply having to become more innovative and carve out new routes to the top.
20.3% of respondents say the opening up of new markets is having a positive effect on growth, while 13.8% cite the benefits of technological advancements.
M&A, too, is becoming a key driver of emerging mid-market growth. In 2018, nearly two-thirds of IoD members (64.3%) would consider an acquisition as a means to expansion.
M&A, but not as we know it
Not all acquisitions deliver growth, however. Rather than simply adding volume, research shows that the most effective acquisitions are those that apply the four corners of M&A: economies of scale; synergy; shareholder value; and disruption.
More than ever, effective deal-making requires a knack for effective planning and strategic thinking. But with growing demands on their time, today’s top-level executives are struggling to find time for strategic leadership.
Fewer than one in five (19.8%) of survey respondents manage to dedicate more time to strategy than to day-to-day managerial responsibilities during the working week. More than half (58.5%) spend over 75% of their time managing.
A lack of strategy also presents a stumbling block for those exiting or divesting part of a business. Pre-sale preparation is critical to a strong outcome and deal value, and clear objectives must be set.
What do you need to achieve before you would consider a business sale?
Vendors must put themselves in the mind of the acquirer: can their company add value to a potential buyer through its employees or its technology? And will the deal generate recurring revenue?
29.3% of respondents cite the necessity of an exit plan before pursuing a sale, though 60% admit not having one in place.
A new breed of leader emerges
To be sure, the challenges facing small- and mid-tier companies are only likely to intensify through the course 2018. In the UK, GDP growth is set to slow further this year, dropping to just 1.5% according to IMF forecasts.
With a third of survey respondents now spending more than 55 hours a week at the coalface, owners and CEOs are working harder than ever to drive their business forward.
But hard work alone is no longer enough. Complex markets require complex thinking and strategic direction. In 2018, leaders must be able to embrace innovation and new technologies and make the most of the available skills and talent.
If harnessed intelligently, M&A can act as a conduit to these growth routes. It requires strategic thinking and a willingness venture outside of the comfort zone and into new sectors and markets.
Sellers, too, must think strategically about how to position their business to make the most of the opportunities on offer.
There is global demand – from Private Equity and Growth Equity investors as well as trade buyers – for well-run companies that can demonstrate a proven track record of success. Effective pre-sale preparation and a robust exit strategy have never been more important.
Above all, there is a need for strong leadership – people with the ability to look beyond the immediate challenges and spot long-term trends and opportunities. Brexit or no Brexit, with the right individuals at the helm, the future doesn’t look quite so daunting.