Mid-market company executives are exhibiting cautious optimism about merger and acquisition activities this year, with many more companies involved in or pursuing a deal, according to the fourth annual Citizens Commercial Banking Middle Market Outlook report.
Selling activity, however, has been stagnant the past year despite high multiples reflecting strong corporate performance,  as sellers express concern about many aspects of the selling process.
Of particular interest to financial advisors is the impending retirement of the first wave of baby boomers. Thirty-eight percent of executives across industries said they expected M&A activity to increase this year owing to the growing number of industry leaders nearing retirement. 
Sixty-nine percent of business owners in the survey said their retirement date was a major factor in deciding when they would sell their business, and 40 percent of non-owners said the company leader’s retirement time frame strongly influenced the timing of the business’s sale. Moreover, small businesses were likelier to move forward with a sale because of a lack of succession planning.
Citizens Commercial Bank in September surveyed some 450 owners and executives of U.S.-based mid-market businesses with annual revenues between $5 million and $2 billion in manufacturing, professional services, technology and technical services, retail and consumer products, financial services and insurance, wholesale trade, health care and social assistance, and construction. 
The study found that even with increased acquisitions, confidence among buyers currently pursuing or actively engaged in an acquisition fell from 51 percent last year to 38 percent this year. One factor, researchers said, was more competition from increased buying activity. In addition, high multiples raised concerns about whether an investment would get an appropriate return. Confidence among sellers was about the same as last year.
Although two-thirds of mid-market executives thought their companies' valuation would rise over the coming year, less than half were more confident than in the past that growth through outside investment was an appropriate strategy for their company to pursue. They cited rising interest rates, the increased national debt and the end of quantitative easing as factors likely to affect the M&A market this year. 
Buyers Off The Fence
Thirty-three percent of executives in the new study—double the number two years ago—believed the market was shifting in favor of sellers, while 51 percent still thought market conditions favored buyers, including 62 percent of the largest mid-market companies.
The study found that the biggest shift from  2014 was that once-passive buyers were now ready to decide whether to make a purchase. Twenty-five percent of respondents were actively involved in buying another company, up from 17 percent the year before. This figure increased to 46 percent for companies with revenues between $100 million and $2 billion.
At the same time, 40 percent of companies had decided to wait a year before launching a purchase. One reason, the study said, could be high valuations, which some potential buyers might hope will moderate.
Increasing revenues was the main driver of acquisitions for 73 percent of respondents. Forty-five percent said a purchase would enable them to better meet market expectations and expand geographical reach, and 42 percent said a purchase would improve operational efficiency and put cash to work. Companies in the $25 million to $2 billion revenue range expressed more interest than the smaller outfits in an acquisition to improve their distribution capabilities. 
Only 9 percent of mid-market companies in the new study were actively trying to be sold. Researchers explained that about two-thirds of companies expected valuations to rise over the next 12 months, possibly prompting some to wait for a more lucrative opportunity. Moreover, with the economy stabilized, companies felt less pressure to sell and could bide their time until the time was right.
For mid-market companies interested in selling, the key factor for 47 percent was providing liquidity to owners. Forty-five percent sought to maximize the value of their organization. In 25 percent of cases, the owner or company leader was nearing retirement or experiencing another life event. 
Both buyers and sellers worried about the effect of their transactions on human capital. Losing key employees was a key concern for 45 percent of sellers and 35 percent of buyers during or after acquisition. Buyers were also concerned about inherited liability and clients’ perceptions of the effect of a purchase on such things as quality and service. Sellers’ other main worries were being underpaid or undervalued by a purchaser, about meeting target or growth goals and about client perceptions. 
A quarter of mid-market respondents were actively raising capital, and another 40 percent were looking to do so. They cited paying for capital expenditures as the main reason, as well as preparing the company for a purchase or sale and development of new products or services.
In this year’s study, commercial banks continued to be the most used third-party partners, favored by 32 percent of both buyers and sellers, with valuation the main service sought. The study said those third parties most likely to benefit from the uptick in M&A activity would be able to guide business executives through the full life cycle of a transaction, from identifying suitors to closing a deal.