Optimistic middle market leaders are setting their sights on growth

Despite the overall positive sentiment among business leaders, there are still concerns around inflation, interest rates, and the cost of labor, energy, and materials. In response, they are looking for ways to ramp up operational and energy efficiencies, increase their sales and marketing efforts to boost revenue, and deploy automation to drive productivity.

Cybersecurity continues to be front and center for business leaders, with one-third of businesses experiencing a cybersecurity or financial fraud issue in the past 12 months. This might point to why 60% of companies plan to implement AI for cybersecurity and fraud management purposes.

Leaders attribute these upticks primarily to continued efficiencies in their business operations and technology advancements. Improved efficiency in business operations remained the top factor contributing to a positive company outlook, cited by 64% of respondents compared to 56% at the end of 2023 and 52% in Q2 2023. Improvements to technology was cited by 60% as a top factor, climbing from 54% at the end of 2023 and 49% in Q2 2023. The ability to attract and/or retain talent was also crucial, with 44% reporting that it was a contributing factor to their positive company outlook.

Meanwhile, middle market business leaders’ overall outlook on the economy held steady. The number of respondents who described their outlook on the U.S. economy over the next 12 months as excellent or very good increased 1 percentage point to 50%. Many leaders who were especially optimistic about their corporate outlooks also shared optimism about the economy, including companies in the retail industry, those in the highest and lowest revenue groups, and businesses based in the Northeast.

Leaders at public companies appear more likely to be involved in buy-side activity than leaders at smaller firms. Middle market companies between $250 million and $500 million in revenue are more likely to seek sell-side opportunities.

Identifying the right targets was the top challenge identified on the buy side. On both the buy and sell sides of potential transactions, middle market leaders cited developing relationships with owners and executives of target firms and cultural considerations (including alignment of values, beliefs, behaviors, and organizational norms) as top-of-mind challenges.

For leaders concerned with access to capital and credit, a large majority (87%) plan to use alternative sources within the next three years. Of those alternative sources, private equity firms were the top alternate source of capital/credit cited by respondents.

AI adoption tops list of methods for expanding operations

Many middle market businesses have set their sights on growth in the second half of 2024. These ambitious leaders are looking to expand their use of technology and automation, add employees, introduce new products, and more. Companies with higher annual revenue are more likely to report investing in several methods of expansion.

Once again, AI topped the list of methods companies are using to expand the scope of their operations. In mid-2024, more than half of those surveyed (54%) reported plans to implement artificial intelligence, an increase of 10 percentage points since the fourth quarter of 2023.

The three top reasons for implementing AI were data analysis, cybersecurity/fraud management, and data entry and/or data processing.

The effects of rising energy, oil, and gas costs continue to take a toll on companies looking to combat inflation. Almost a third (29%) of leaders reported negative effects on business operations due to higher energy costs. The number of those respondents who have experienced shrinking profit margins as a result of higher energy costs increased by 9 percentage points during the first half of 2024.

An increasing number of leaders (42%) are also seeing decreased revenue due to higher energy costs, compared to the end of 2023 (36%) and Q2 2023 (37%). To combat rising energy costs, affected business leaders plan to increase energy efficiency efforts and improve processes/create operational efficiencies.

It is not all bad news: Some middle market business leaders reported positive outcomes from inflation. Among those with a positive economic outlook who reported at least some positive impact from inflation, increased productivity was the top benefit. The number of these companies citing the ability to increase prices as a positive outcome of inflation also increased by 12 percentage points to 41% since Q4 of 2023.

Despite the severity of these threats, only about half of those surveyed used multifactor authentication, and only 36% had security measures in place to prevent unauthorized devices from connecting to their networks. When asked how they plan to bolster cybersecurity defenses in the coming year, 21% of middle market business leaders plan on implementing controlled access to servers and key technologies, followed by using anti-malware protection on all business computers (19%), and requiring dual authorization for outgoing payments (19%).

In addition to high-tech security threats, old-fashioned paper check fraud remains a cause of financial losses among middle market businesses. Fraudsters are becoming more organized and sophisticated — and businesses need to protect themselves accordingly.

Conclusion

At the mid-year mark for 2024, middle market business leaders’ optimism about their companies’ financial prospects soared to its highest point since mid-2022. This optimism, reflected by nearly 80% of business leaders surveyed, continues to be driven by improvements in operational efficiency and improvements in technology.

Companies anticipating strong performance over the coming year are exploring M&A opportunities and private equity engagement with an eye toward growth. To expand their operations over the next six months, middle market business leaders plan to implement AI, expand their use of technology and automation, and add more employees.

At the same time, inflation backed by high costs remains a stubborn challenge for many middle market companies, with more than one-third reporting that increases in inflation are currently having a negative impact on their business. Cybersecurity and financial fraud also pose threats to business operations, and companies are taking measures to bolster their defenses accordingly.

It has been a tumultuous few years for businesses, and the middle market is no exception. But heading into the second half of 2024, most middle market business owners and executives are looking forward with renewed confidence and a charted path toward future growth.