THE MARKET THAT MOVES AMERICA F I N D I N G S FROM T H E NCMM S Q2'17 I N D I C ATO R S U RV E Y

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1 Q2'17 MIDDLE MARKET INDICATOR ACG WEBINAR July 26, 2017 THE MARKET THAT MOVES AMERICA F I N D I N G S FROM T H E NCMM S Q2'17 I N D I C ATO R S U RV E Y T h o m a s A. S t e w a r t, E x e c u t i v e D i r e c t o r T h e N a t i o n a l C e n t e r f o r t h e M i d d l e M a r k e t

2 2 THE MIGHTY MIDDLE MARKET 2

3 THE NATIONAL CENTER FOR THE MIDDLE MARKET 3 The National Center for the Middle Market is a collaboration between The Ohio State University s Fisher College of Business, SunTrust Banks Inc., Grant Thornton, and Cisco Systems. It exists for a single purpose: to ensure that the vitality and robustness of Middle Market companies are fully realized as fundamental to our nation s economic outlook and prosperity. The Center is the leading source of knowledge, leadership, and innovative research on the middle market economy, providing critical data analysis, insights, and perspectives for companies, policymakers, and other key stakeholders, to help accelerate growth, increase competitiveness and create jobs in this sector. MIDDLE MARKET RESEARCH & DATA EXPERTISE & OUTREACH Quarterly Middle Market Indicator Share Research & Discuss Trends EDUCATION Research and Expert Perspectives Executive Programs Interactive Benchmarking Tools Webinars 3

4 THE MIDDLE MARKET INDICATOR 4

5 MIDDLE MARKET INDICATOR OVERVIEW A Quarterly National Survey Cut by Geography and Industry 5

6 Q2'17 MIDDLE MARKET INDICATOR EXECUTIVE SUMMARY FOLLOWING A RECORD-SETTING FIRST QUARTER, THE MIDDLE MARKET CONTINUES TO LEAD THE U.S. ECONOMY IN REVENUE GROWTH AND JOB CREATION 1 2 THE MIDDLE MARKET CONTINUES WITH RECORD HIGH JOB CREATION AND REVENUE GROWTH, FUELED IN PART BY A SURGE IN M&A ACTIVITY 3 EXPECTATIONS FOR GROWTH AND JOB CREATION IN THE COMING YEAR ARE ALSO STRONG CONFIDENCE IN THE U.S. AND LOCAL ECONOMIES HIT RECORD HIGHS; GLOBAL CONFIDENCE HAS REBOUNDED 4 Source: 2Q 17 Middle Market Indicator Report 6

7 Q2'17 U.S. MIDDLE MARKET EXECUTIVE SUMMARY REVENUE GROWTH 6.7% PAST 12 MONTHS EMPLOYMENT GROWTH 5.7% PAST 12 MONTHS CAPITAL INVESTMENT CONFIDENCE 70% GLOBAL ECONOMY 4.75% S&P % NEXT 12 MONTHS 1.3% SMALL BUSINESS 2.5% LARGE BUSINESS 4.7% NEXT 12 MONTHS 67% WILL INVEST 84% NATIONAL ECONOMY 87% LOCAL ECONOMY Source: 2Q 17 Middle Market Indicator Report 7

8 Q2'17 MIDDLE MARKET INDICATOR REVENUE GROWTH PAST 12 MONTHS 16.0% 6.7 % U.S. MIDDLE MARKET 9.5 % PE-OWNED FIRMS 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 4.75 % S&P 500* 0.0% -2.0% -4.0% -6.0% Source: 2Q 17 Middle Market Indicator Report *2Q numbers include only companies who have reported. Series2 Series1 Series3 8

9 THE RISING TIDE CONTINUES TO LIFT ALMOST ALL BOATS 2Q Q 2016 Performance improved Performance was unchanged Performance deteriorated 65% 64% Source: 2Q 17 Middle Market Indicator Report 9

10 Q2'17 MIDDLE MARKET INDICATOR INDUSTRY REVENUE GROWTH Source: 2Q 17 Middle Market Indicator Report 10

11 Q2'17 MIDDLE MARKET INDICATOR REVENUE GROWTH FORECAST NEXT 12 MONTHS 5.3 % U.S. MIDDLE MARKET 16.0% 14.0% 12.0% 10.0% 4.7 % PE-OWNED FIRMS 8.0% 6.0% 4.0% 2.0% 0.0% Source: 2Q 17 Middle Market Indicator Report U.S. MIDDLE MARKET PE-OWNED 11

12 Q2'17 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH PAST 12 MONTHS 5.7 % U.S. MIDDLE MARKET 14.0% 12.0% 10.0% 1.3% SMALL BUSINESS 2.5% LARGE BUSINESS 8.0% 6.0% 6.7 % PE-OWNED FIRMS 4.0% 2.0% 0.0% Source: 2Q 17 Middle Market Indicator Report U.S. MIDDLE MARKET SMALL LARGE PE-OWNED FIRMS 12

13 Q2'17 MIDDLE MARKET INDICATOR INDUSTRY EMPLOYMENT GROWTH Source: 2Q 17 Middle Market Indicator Report 13

14 Q2'17 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH FORECAST NEXT 12 MONTHS 4.7 % U.S. MIDDLE MARKET 6.8 % PE-OWNED FIRMS 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Source: 2Q 17 Middle Market Indicator Report U.S. MIDDLE MARKET PE-OWNED FIRMS 14

15 CONFIDENCE, INVESTMENT PLANS, AND CHALLENGES 15

16 1Q '12 2Q '12 3Q '12 4Q '12 1Q '13 2Q '13 3Q '13 4Q '13 1Q '14 2Q '14 3Q '14 4Q '14 1Q '15 2Q '15 3Q '15 4Q '15 1Q '16 2Q '16 3Q'16 4Q'16 1Q'17 2Q'17 Q2'17 MIDDLE MARKET INDICATOR ECONOMIC CONFIDENCE Confidence Remains Strong Across the Board 90% 80% 70% 60% 50% 40% 30% 20% GLOBAL ECONOMY 70% 85% PE-OWNED U.S. ECONOMY 84% 89% PE-OWNED LOCAL ECONOMY 87% 91% PE-OWNED GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY Source: 2Q 17 Middle Market Indicator Report 16

17 1Q '12 2Q '12 3Q '12 4Q '12 1Q '13 2Q '13 3Q '13 4Q '13 1Q '14 2Q '14 3Q '14 4Q '14 1Q '15 2Q '15 3Q '15 4Q '15 1Q '16 2Q '16 3Q'16 4Q'16 1Q'17 2Q'17 Q2'17 MIDDLE MARKET INDICATOR CAPITAL INVESTMENT PLANS Firms Plan to Invest 80% 75% 70% 65% 60% 55% 50% 45% 40% Source: 2Q 17 Middle Market Indicator Report PE-OWNED U.S. MIDDLE MARKET 17

18 COMPANIES FEEL COSTS ARE UNDER CONTROL AND PROFIT MARGINS SAFE 20% Expected Change in Profit Margins Cost Structure 15% 10% 5.9% 5% 2.6% 2.4% 2.5% 2.8% 3.1% 2.4% 2.6% 1.9% 2% 2.6% 3.1% 3.4% 4.3% 3.2% 0% 0% Q 1.3% Q 2.2% 2.3% 2.3% Q Q Q 1.7% 1.6% Q Q 1.2% 1.1% Q 1Q 2.3% 2.1% 2.1% Q Q Q Q 2% Q

19 Q2'17 MIDDLE MARKET INDICATOR CHALLENGES BUSINESS AND STAFF/EMPLOYEES ARE TOP OF MIND FOR MIDDLE MARKET LEADERS BUSINESS 67% STAFF/EMPLOYEES 50% STAFF/EMPLOYEES COSTS 29% 57% BUSINESS COSTS 19% 43% BUSINESS GOVERNMENT 37% 29% BUSINESS GOVERNMENT 31% 27% COMPETITION 22% COMPETITION 18% COSTS ECONOMY 16% 12% COSTS 15% ECONOMY 10% Source: 2Q 17 Middle Market Indicator Report 19

20 LEADERSHIP SKILLS: WHAT FAST GROWING COMPANIES DO BEST Performance on Leadership Skills (One of Strengths) 10%+ 5% - <10% Growth Rate 1% - <5% 0% Negativ e Setting strategic direction Driving planning and execution Developing talent Communication Delegating / empowering the team Balancing risk and opportunity Communicating vision and values Creating a sustainable enterprise Sharpening customer focus Sparking innovation Strengthening emotional intelligence Encouraging diversity Other Source: 2Q 17 Middle Market Indicator Report

21 LEADERSHIP SKILLS: WHAT FAST GROWING COMPANIES NEED MOST Top Leadership Skills Needed (Ranked 1 st -5 th ) 10%+ 5% - <10% Growth Rate 1% - <5% 0% Negative Setting strategic direction Driving planning and execution Developing talent Communication Delegating / empowering the team Balancing risk and opportunity Communicating vision and values Creating a sustainable enterprise Sharpening customer focus Sparking innovation Strengthening emotional intelligence Encouraging diversity Other Source: 2Q 17 Middle Market Indicator Report 21

22 7 DEAL MAKING: APPETITES AND OBSTACLES 22

23 THE APPETITE FOR M&A IS ROBUST ESPECIALLY AMONG PE-OWNED FIRMS LIKELIHOOD OF MAKING M&A DEALS IN NEXT 12 MONTHS 38% 53% 32% 38% 38% Total MM PE Not PE Family Not Family 43% 33% 39% 41% 38% 35% 39%

24 BUYERS SEEK CUSTOMERS, PRODUCTS, TALENT, AND SCALE IMPORTANT WHEN DECIDING TO MAKE ACQUISITION (RANKED 1 ST / 2 ND /3 RD ) PE Not PE Family Not Family Add new markets and customers 34% 68% Diversify product or service portfolio 13% 45% Acquiring new talent/leadership 11% 42% Acquiring a technology, patent, or product 7% 36% Achieving economies of scale 9% 32% Consolidating the competition 7% 30% Acquiring a brand 12% 29% Utilizing liquidity 6% 19% Ranked 1st Ranked 1st/2nd/3rd

25 SELLERS ARE MOTIVATED BY SUCCESSION AND PROFITABILITY IMPORTANT WHEN DECIDING TO MERGE OR SELL (RANKED 1 ST ) Succession or retirement issues Opportunity to sell at an attractive price Total MM 20% 19% PE Not PE Family Not Family Competition Focus on core, sell off non-core business Declining revenue or profitability Becoming part of a larger/more recognized brand Access to deeper pockets, more capital 18% 13% 12% 10% 7%

26 COMPANIES ON THE SIDELINES EMPHASIZE PROFITS, ORGANIC GROWTH REASONS NOT LIKELY TO MAKE M&A PE Not PE Family Not Family We are focused on increasing profitability Our strategy is to grow organically at this time There are no attractive opportunities out there 24% 37% 35% We don t have access to capital for M&A We are still digesting recent M&A activity We are constrained from M&A by other factors (e.g. regulation, industry structure) 11% 9% 6% Other 3%

27 WHAT S MOST CONFUSING: STRATEGY, FINDING THE RIGHT PARTNER MOST CONFUSING ASPECT Total MM PE Not PE Family Not Family Getting the strategy right 38% Finding the right target or the right buyer 36% Post-merger integration 22% Valuations too high to consider buying 20% Valuations too low to consider selling 12% Other 7%

28 WHAT S MOST CHALLENGING: PARTNER AND PRICE Issues with M&A PE Not PE Family Not Family Finding the right partners Achieving the right valuation Protecting/considering employees Maintaining culture during the integration Tax considerations Access to capital Convincing owners (e.g., including family members) Convincing the board or leadership team Finding the right advisors 45% 44% 35% 32% 30% 28% 24% 21% 16% Other 1%

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30 MIDDLEMARKETCENTER.ORG 30