Last month we discussed the use of private equity disciplines to radically grow the valuation of your firm. However, we know that are forces sometimes out of the control of senior management to affect that growth, or at least slow it down.
So here we want to provide an Outlook for 2016 of what middle market companies say their key issues are. I have researched a variety of sources, but will rely mostly on Deloitte’s annual survey of 700 executives in middle market firms. The size of these firms is from about $200 million to $750 million in annual revenue. While this size firm is larger than most of our businesses in Northwest Louisiana, I find they correlate with my discussions with executives in our area in the fourth quarter of 2015.
Top Issues Among Mid-market Firms
On net, the mid-market firms will put a brake to their growth efforts in 2016 relative to their growth efforts in the 2012-2015 time frame. Here are their top issues:
- The level of confidence in the growth of the US economy over the next 24 months is falling somewhat. In fall of 2014 19.6% of respondents were Extremely Confident the economy would continue to improve. By fall of 2015, only 9.8% thought so. However, 30% remain Confident the economy will continue to improve.
- At the same time, hiring continues to be strong in the mid-market firms. 56% of the firms surveyed said their workforces grew in 2015. 61% say this trend will continue in 2016.
- Mergers and Acquisitions are strongly desired but harder to do. Why? Interest rates are low and there is a lot of cash built up in some mid-market firms. Thus there are more buyers looking at the same acquisition targets causing the price of the targets to be bid up to very high levels.
This Year’s Obstacles to Growth
So in this hazy situation, what are the main obstacles to growth according to various surveys?
- Uncertain economic outlook discussed above is making executives think twice before investing
- Rising health care costs
- Increased regulatory compliance
- The possibility of further interest rate hikes. While some mid-market firms are awash with cash, some will have to rely on credit markets to fund growth
- More than a quarter of the executives surveyed are now saying the cost of staying up with information technology is becoming an obstacle to growth. They soundly embraced investments in cloud technology and data analytics to help increase productivity in the 2012-2014 time frame, but now say keeping up is getting very expensive
- The shortage of labor with the right skill sets and ability to fit with corporate culture remains a big issue, as it was in 2015. Demand for a smaller supply of great talent is causing salary increases and training and education costs are rising to keep the great employees firms already have.
What Can Government Do To Help?
The respondents’ answers to the question what can government do to help mid-market companies are:
- Reducing corporate taxes
- Rolling back health care reform
- Keeping interest rates low
- Easing bank lending practices
- The government supporting increased infrastructure investment through some kind of tax credit
So despite some challenges, mid-market companies are planning to try to continue their growth, but with moderation relative to the last three years. Global competition shows no signs of slowing and skilled talent is harder to find and keep. Acquisitions are harder to do and the question is can a firm grow through developing new products and services internally? And keeping up with technology is getting more expensive.
How do these issues relate to your firm in Northwest Louisiana? Is it time for you to hit the pause button for 2016, or should you continue any growth efforts you started in 2015?
This article is part of a series on what causes a firm’s value to increase
Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty-five years in the strategy consulting industry before returning to academia full time at LSUS. He is involved with several global professional strategy organizations and can be reached at firstname.lastname@example.org or www.billbigler.com.