By Scott Bushkie
Several years ago I used to talk about the cost-benefit tradeoffs of buying a business versus starting one from scratch. Grow a business from the ground up and the payoff potential roughly equals the risk: in a word, huge.
In those days, my audience was high net worth individuals who were deciding whether to buy a going concern or roll the dice with a start-up operation. Now, market trends mean we are more likely to work with corporations rather than individual buyers. But even while the players have changed, the analysis remains the same: buy or build?
Middle market companies are making plans to grow over the next 12 to 18 months, and as they consider potential growth options many plan to make “buy” a key part of their corporate growth strategies.
In survey results just released from Merrill DataSite, more than 200 middle market executives reported on business growth expectations, and the vast majority (86 percent) focused on expansion in 2012.
Just how do they plan to do it? Roughly a third (37 percent) plan to only “build” through internal growth, one in 10 will focus solely on “buying,” and most (40 percent) will pursue a combination of internal growth and acquisition.
After years of conservative spending, companies have significant cash reserves, and that’s a signal that it’s time to invest in topline growth. According to the survey, most respondents (32 percent) said their company’s future acquisition strategy would be to increase market share in an existing market or product.
Another 24 percent of companies are interested in entering new markets or product lines via acquisition. And with today’s skilled labor shortage, another 13 percent indicated interest in acquiring access to people of a certain skill-set. (An additional 23 percent said objectives were a combination of all these goals.)
Again, corporate cash reserves are at an all-time high. Reportedly the S&P’s top 20 companies alone are sitting on as much as $1.4 trillion in cash. But even smaller players appear to have money to spend.
When asked how they anticipate paying for acquisitions over the next 12-18 months, 36 percent said cash, and 23 percent said it would be a combination of cash and stock. Cash at close is always good news for sellers who want to eliminate risk and take money off the table.
That said, respondents are still managing risk as they plan to acquire smaller-size companies. Most (41 percent) said they were looking at targets with less than 10 percent of their own revenues. And another 38 percent said they’d look at targets between 11 and 25 percent of corporate revenues.
All this is good news for business owners in the lower middle market. The middle market is looking. Are you ready to be found? There are definitely business opportunities here.
Scott Bushkie is President of Cornerstone Business Services, a low-to-middle-market M&A firm. Reach him at 888-829-9061 or [email protected]