Previously published with "Global Business Magazine"

Middle Market Rules

"Today the public company is in trouble: the organisation that has been at the heart of capitalism for the past 150 years faces a loss of confidence in its Anglo-Saxon heartland and the rise of powerful challenges abroad. The number of companies listed on the major American stock exchanges has been declining relentlessly in recent years, from a peak of just over 7,000 in 1997 to just over 4,000 now." (The Economist:The World in 2012.)

While the larger publicly traded companies dwindle in number because of regulatory and other costs, the influence of the middle market private business sector in America is staggering. Virtually ignored by academia and the media, this vitally important sector is one of the most important drivers of America's economy and yet it flies largely under the radar. Accounting for a third of private sector GDP and jobs, it has been growing in the face of the past four difficult years of 'the great recession'. If the U.S. Middle Market were a country, its GDP would rank it as the fourth-largest economy in the world, just behind Japan's. Clearly then, there is a need to better understand this important market sector and provide it with the level of support, attention, and advocacy it merits.

"Results from this largest study ever of the U.S. middle market show this business segment is the nation's surest bet for economic recovery. The study, a survey of more than 2,000 business leaders and analysis of economic data, defined this segment between small and big business, surprisingly resilient throughout the economic crisis." (GE Capital 2011:National Middle Market Summit The Market that Moves America Insights,Perspectives, and Opportunities from Middle Market Companies: GE Capital & The Ohio State University's Fisher College of Business.)

However, meaningful information about these middle market private companies can be incredibly hard to locate. They are not regulated by the federal government and thus, in most cases, are not required to regularly file with the Securities and Exchange Commission. The mergers and acquisitions marketplace for these companies is somewhat chaotic, highly fragmented, and often fails to capture any substantial efficiency in scale, particularly at the lower end of the middle market with private companies valued at less than $150,000,000.

Role of middle market M&A Advisors in the economy

M&A Advisors provides essential liquidity to small and private businesses in America. Large businesses have the option of going public to seek growth capital and get liquidity to their entrepreneurial efforts. However, access to public market capital and liquidity options is not available to small and mid-size companies. Also, entrepreneurs by nature are creative and free-spirited. Not all are motivated to go public or want to face the scrutiny of external oversight. They rely upon the services of intermediaries for capital access and liquidity. The M&A Advisor facilitates that liquidity by creating a market for each transaction and managing the actual exchange process.

Often without significant regard for the very special personal financial planning needs of the private company owner, this market has been served by numerous advisors and intermediaries, ranging from accountants and management consultants – to investment bankers - to small business brokers. Unfortunately, some of these various market participants are less than fully qualified or reputable. Investment bankers tend to concentrate on the larger deals only and may take on a middle-market business client only as an accommodation or 'fill in' activity. For reasons of economics, they primarily focus on servicing publicly traded companies and financing engagements, rather than the 'full service' business and personal financial advisory needs of small to mid-sized private business clients. Because of these current market realities, often many business owners lack access to a knowledgeable and trustworthy M&A advisor.

A very large part of America's wealth lies with these private, family-owned businesses. 7.5 million of the 25 million businesses in the United States have one or more employees. The larger companies of this sector, with 50 or more employees, represent the primary middle-market. Over 90% of all business enterprises in North America and the majority of businesses internationally are family-owned. Post-World War II entrepreneurs, having built this great wealth are at the age when they must decide the manner in which to transfer accumulated wealth, secured primarily in the value of their family businesses. In the next five years, 39% of family-owned firms will experience a change in leadership due to retirement or semi-retirement. According to a recent national survey, 25% of senior generation family business shareholders have not completed any estate planning, other than writing a will; 81% want the business to stay in the family; and 20% are not confident of the next generation's commitment to their business.

The cumulative effect of this landmark 'succession event' will be the largest intergenerational transfer of wealth in U.S. history. Cornell economist Robert Avery estimates that approximately $10.4 trillion of net worth will be transferred by the year 2040, with $4.8 trillion being transferred in the next 20 years. The highly fragmented marketplace for financial advisory and transaction services offers a very opportunistic scenario for future economic growth and profitability. With the growing numbers of small businesses, revolutionary new technology, and a rapidly changing global competitive environment, the middle market is now in the midst of an extraordinary transformation.

In the late 1990's, responding to meet the void in this overlooked marketplace, the Alliance of Merger & Acquisition Advisors, (AM&AA) - a Chicago-based, international professional trade association - was formed. Its goal was to share information, education, trusted relationships and extensive 'behind the scenes' support, to highly qualified business professionals seeking to better position themselves to serve the many transactional advisory needs of small to mid-sized, private companies.

Today the AM&AA is the leading credentialing body for more than 800 middle market M&A professionals in more than 20 countries. These highly qualified, independent M&A experts identify and exchange new investment opportunities and provide market liquidity for privately held companies. Their services include financial and operational due diligence, accounting, finance, business valuation, tax, legal, strategic planning, and a wide variety of other advisory and transaction support services.

The founding core values of AM&AA

  • A willingness to freely share knowledge and expertise.
  • Transparency and accountability in financial reporting.
  • A belief in 'coopetition', which is a blend of cooperation and competition - or the act of helping an existing or future competitor in order to benefit oneself.
  • The commitment to life-long learning with a desire for continuous professional self-improvement.
  • A belief that technology will increasingly affect the delivery of services and communication with clients and other constituents (i.e., peers, capital markets, the investing public, and clients).

Historically, by training and experience, most financial advisory professionals focus on just one or two specialised services, such as business valuation, legal, accounting, tax, M&A, etc. Most fail to completely understand the owner's fundamental personal needs, or comprehensively evaluate the company's overall business performance and potential. Because the needs of the middle market private business owner and the company are inextricably intertwined, superior M&A and financial advisors focus on the whole and not just individual parts. The most highly valued advisors are those that combine the expertise of deep speciality know-how, with broad generalist knowledge across many strategically critical and diverse disciplines.

The best M&A advisors often also build relationships with other professionals, to help clients establish investment goals and objectives that are consistent with their risk tolerances, unique circumstances and needs. While maintaining high ethical standards and adhering to the fiduciary duty due to the client, all of the MDP professionals working with private company owners should use a holistic framework to consider a client's total portfolio, which includes both financial and non-financial assets.

Due to trends such as the globalisation of middle markets, the internet, and greater overall knowledge and awareness of exit alternatives, business owners frequently will firstly ask for help and direction from any one of their trusted advisors. To respond most effectively to such requests, a small group of highly qualified AM&AA professionals have developed a comprehensive training forum to share their collective M&A know-how and experience. The 'Certified Merger & Acquisition Advisor' (CM&AA) credential is a 'first-of-its-kind' certification for the middle market attracting experienced investors and M&A advisory professionals of all types.

Global recognition of CM&AA as a business leader and strategic partner in building long-term sustainable organisational success

This vision focuses on enhancing the profile, influence, and relevance of professional M&A advisors. It recognises that many professionals in this sector are in a position of strategic or functional leadership, or are otherwise well placed to collaborate with colleagues in other disciplines, to create long-term sustainable value for their organisations. Business leaders typically perform director or management roles, while strategic business partners support and participate in decision-making and direction at various levels of the organisation.

The organisation was founded on this basic principle of multi-disciplinary professional collaboration. Today many financial professionals focus on just one or two of the pieces of the overall business picture i.e., valuation, legal, accounting, tax, etc. They fail to completely understand the owner's fundamental personal needs and comprehensively evaluate the company's overall business performance and future growth potential. "The biggest mistake that consultants make is to overspecialise...clients start out, saying, `I do need an expert in this area.' But, ultimately, they stick with the professionals who provide synthesis, a big picture view, and more than just expertise," says consultant Andrew Sobel in the bookClients for Life.

In today's economic environment, the lines between formerly distinct disciplines are fading, and experienced technical experts require new advisory skills to better understand and collaborate with other experts essential to the completion of successful M&A and other corporate financial transactions. As the first recognised standard of professional competence for these types of M&A transactional advisory services, the CM&AA designation complements and extends the value of all other existing credentials and academic degrees, such as JD, MBA, or CPA.

The CM&AA designation serves to maintain the highest recognised standards of professional excellence for middle market corporate financial advisory and transaction services, as well as to provide a benchmark for professional achievement within that overall body of knowledge.

M&A advisors have an unprecedented opportunity in the middle market, with the generational transfer of wealth and capital being deployed by private equity and corporate investors. Because of the need for much better decision-making information in this middle market, leading certified members of AM&AA have just recently published:Middle Market M&A: Handbook for Investment Banking and Business Consulting.This book is a must-read for investment bankers; M&A intermediaries and specialists; CPAs and accountants; valuation experts; deal and transaction attorneys; wealth managers and investors; corporate development leaders; consultants and advisors; and CEOs and CFOs.

In addition to this, the AM&AA is now working in close collaboration with several institutional partners, to build a new web-based 'centre of excellence' that will offer access to a directory of highly qualified subject matter experts, a central repository for research and study materials, as well as a clearinghouse of best practice, process and standards. It will also offer a source of both transaction and educational opportunities on the given subject or topic, as well as the establishment and maintenance of web-based dedicated collaboration/idea generation facilities (www.midmarketplace.com ).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.