Business leaders are increasingly optimistic about growth in the economy and in their companies, according to the results of the annual Business Pulse Survey by SunTrust Banks Inc. While this growth presents plenty of dealmaking opportunities in the year ahead, it also poses a severe challenge as executives struggle to keep up with hiring demands.
“Attracting and retaining employees is the top challenge of 2018,” says Jim Geuther, Cleveland market president for SunTrust — which just opened its commercial bank office in Cleveland last August. “There’s a huge demand for employees that’s way outstripping the supply.”
Instead of just trying to fill positions, savvy dealmakers can position their companies for growth by strategically acquiring the talent they need. Geuther spoke with Smart Business Dealmakers about “acquihiring” and other important trends revealed in SunTrust’s survey results.
How would you describe the M&A market in Cleveland right now?
If I were to put one word around it, it would be: healthy. There are four macro factors that are driving dealmaking activity:
- Business confidence. The SunTrust survey found that the majority [62 percent] of middle market leaders believe the U.S. economy is strong, and they’re even more optimistic [79 percent] about their own company’s strength. Obviously, employment is continuing to grow at a robust pace, and with unemployment being historically low, the demands for work are certainly outpacing the supply.
- Strong market valuations. Public trading multiples across industry sectors are at all-time highs, and that sets the benchmark for private companies. We’re seeing M&A deals resulting in the private space with very strong valuations.
- Constructive debt markets. Despite recent increases in interest rates, companies can still borrow at attractive rates, which generally facilitates higher purchase prices. Plus, banks are really well capitalized with an appetite to book more loans for healthy and high-growth companies.
- Available capital. There are huge pools of private equity that have been raised in recent years, with fund managers eager to put the capital to work. The tax reform is also creating a pool of dollars for business owners to invest in their businesses for the long term.
What are the biggest trends, challenges and opportunities you see for Cleveland dealmakers this year?
A trend that really jumped out from another recent survey conducted by the National Center for the Middle Market and sponsored by SunTrust is that M&A is critical to the growth of many middle-market companies. In fact, 60 percent of companies surveyed view M&A as key to their growth strategy. All the 400 respondents either completed an acquisition or sale in the last three years or are highly likely to sell in the next three years.
The challenge is that most executives have very limited M&A experience. For those that are looking to buy, 70 percent have little or no prior experience in M&A. For companies that have sold or are likely to sell, 90 percent have little or no prior experience. But you don’t have to learn from the school of hard knocks. Rather, seek the advice of people who have been in this space. They can level the playing field by bringing their expert opinion to help you plan early on.
How have M&A and hiring become intertwined?
The war for talent is very real. In SunTrust’s Business Pulse Survey, nearly 50 percent of companies said that attracting and retaining employees is their top challenge, and this increased growth and confidence is increasing the demand for employees. Across industry sectors, any organization that’s looking for top talent is having a hard time finding it. So we’re seeing the trend of “acquihiring” becoming more common as companies look to acquire the talent they need. Whether a company is looking to add new product offerings, expand geographically or find a new business sector, they can add those capabilities through acquisition.
What are the keys to successfully closing an “acquihire” deal?
In all cases, planning drives results. My dad was a Boy Scout, so if I heard it once, I heard it a million times: Proper preparation prevents poor performance.
Planning maximizes the likelihood of success and leads to less stress. So many of the business owners we work with have devoted a tremendous amount of time and effort to developing a strategic business plan — but they don’t invest the same time and energy in developing a plan for transition. All companies will transition in some way, shape, or form — whether that be an ownership transition, a management transition, a full or partial sale. It’s going to happen, so plan for it.
My advice is to play chess, not checkers. You have to approach deals in a very strategic way, so start early and plan with the end in mind. You have to make cultural fit a significant piece of your strategy. Have a well-thought-out process for making sure there’s cultural alignment. Anything that doesn’t match culturally, you’ve got to be willing to walk away from.
How to reach: SunTrust, www.suntrust.com
View infographic of survey results here.