While very few middle market companies achieve an M&A event, I have yet to meet an entrepreneur that does not dream of the coveted sale of their company for maximum exit to fund their next big thing or create generational wealth.
In fact, of those companies that went to market in 2022, only 61% achieved an exit. I suspect 100% of those companies thought they were well prepared and highly sellable.
Further, another 80% of the rest of the market of would-be sellers that sought advice to answer the questions: Am I sellable, and will the value meet my expectations? came away with an answer of no, not now, or not yet, because their level of preparedness or their value expectation do not reflect reality.
Those potential leaders have a choice of what to do next. From my experience, here is the distribution of choices that Middle Market entrepreneurs make in response to readiness and valuation discrepancies:
- Do Nothing. ~40%
- Get to work on value acceleration and de-risk the business to become sellable. ~20%
- Of those that try above only 10% are actually successful dedicating time resources and outside help (acknowledging their internal limitations) to get it done.
- Modify their dream / plan i.e., sell to management, key employee, next generation, ESOP or keep the company further into the corporate lifecycle. ~20%
- Ride the wave downward to liquidation. ~20%
The problem with “do nothing” is relying on hope vs. a plan to fund your retirement or next act is do nothing almost always leads to #3 or #4 above. A lesser dream or a bad nightmare.
Why?
- Competitors don’t stand still.
- New leadership skills are being added to the market.
- Fresh ideas and young blood challenge the status quo.
- New business models emerge.
- New technologies replace your offering.
- Time makes commodities of us all.
- Innovation slows and margins get compressed etc.
As an investment bank we have seen many an entrepreneur not heed the sage advice of Kenny Rogers – “You Gotta know when hold ‘em know when to fold ‘em. Know when to walk away and know when to run.”
We have seen countless entrepreneurs snatch defeat from the jaws of victory. The training company whose customers bought CDs had to counter the internet and free training. The SaaS platform killed by a competitor with a freemium offering. If large companies can fall prey to do nothing (Remember Blockbuster vs. Netflix) middle market companies can as well and are at greater risk due to their size.
Regardless of your approach to fulfilling your dream or response to the abject reality of the market, Do Nothing is deadly!
Protect yourself and your largest investment by ensuring you pressure test your leadership against do nothing. Or, if paralyzed, bring on a change agent to ensure your competitiveness and keep your dream alive.
Merit Investment Bank’s Value Enhancement team and board advisory services may be part of the answer. We are here to help.
Merit Investment Bank is a leading boutique investment bank focused on entrepreneurial middle-market companies. Merit Investment Bank executes sell-side M&A, buy-side M&A, capital advisory services, debt and equity capital raises, corporate finance, and valuation services. www.meritinvestmentbank.com
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