A glance at last year’s middle market, and what to expect for 2017

Acquisitions play a notably smaller role. In 2016, 24 percent of the middle market either made an acquisition or a sale. The number plunges when you remove companies owned at least in part by private equity firms; of the non-private equity-owned companies, just 17 percent were involved in a deal in 2016.

The organic growth in the middle market may explain its vigorous job creation. While inorganic growth can have many benefits, deals are often done in pursuit of “synergies”— i.e., cost savings — whereas new markets, products and services usually mean new hiring.

Forty-four percent of middle-market executives say innovation pushes them to hire new talent.

Executives are cautious

MMI data, as well as other NCMM studies, depict a sector that on the whole handles money prudently. Only one company in eight says it took on new debt last year, despite historically low interest rates.

In 2016 Q4, 35 percent of executives would put aside an additional dollar of revenue as savings or for future use rather than put it immediately to work.

Over the history of the MMI, middle-market companies have been deliberate about hiring, adding workers even in temporary downswings, but also conservative about hiring before they are sure of the persistence of an upswing.

Robust growth and tight-fisted fiscal management are often thought to be at odds with each other. The middle market, which (mostly) does not need to please or appease public shareholders, appears to be able to present both a strong balance sheet and an exciting income statement.

Talent is the biggest challenge, constraint

It stands to reason that the middle market — the most aggressive hirer — would feel a talent pinch more than others.

Indeed, middle-market companies rank talent management among their top three challenges more often than maintaining growth and managing costs combined. Smaller middle-market firms — $10 million to $50 million in annual revenue — are particularly likely to report recruiting difficulty, but talent is a struggle across the board.

Thirty-seven percent of companies say lack of talent is constraining their ability to grow, while 25 percent of middle-market companies say their biggest recruiting challenge is finding salespeople — which by itself would be an impediment to growth.

 

For the last five years, the U.S. has enjoyed steady and moderate growth, low interest rates, cheap energy, negligible inflation, slower increases in health care costs and little cost pressure from materials or wages. It’s unlikely that these favorable conditions will entirely persist.

If and as they change, the middle market’s challenges will change, too. For now, though, the middle market enters 2017 — and the MMI its second half-decade — with the highest levels of confidence it has ever shown.

 

The National Center for the Middle Market, the leading source for knowledge, leadership and research on midsize companies, is based at the Fisher College of Business, in collaboration with The Ohio State University. Click here for the 4Q 2016 Middle Market Indicator