Once braced for the worst, the middle market now hopes for a rebound

Similarly, perceptions about the overall health of their business amid COVID-19 have remained flat since business executives were last surveyed in June. More than half of respondents (52%) say they are very or somewhat positive about the health of their business. The positivity can likely be attributed to the fact that most middle market businesses continue to feel that the impact of COVID-19 on their business has been the same or better than their original expectations. In fact, respondents who say it has been better than expected have grown from 35% in June to 40% now. It’s germane to say that those expectations might have been low, given the lack of visibility into the future anyone had in the first few months of the pandemic.

Why do leaders have more concerns about the nation than about their business? It could be because they acted swiftly and decisively against the virus within their organizations. The majority of middle market businesses report changing their operations somewhat or very much in response to COVID-19. These actions included: taking additional safety measures (85%), seeking out loans or additional sources of credit (52%), and reducing staff or compensation (49%).

“The Paycheck Protection Program was a nice buoyancy device that most companies used as it was intended: to keep people employed and cover expenses,” said Joseph Markey, East Regional Sales Executive, KeyBank.

However, Markey points out that while businesses that received funding in first round of the federal stimulus may be on solid footing now, other companies that didn’t get access to funds in the first round² or are in harder hit industries such as travel, retail or entertainment, may need more stimulus assistance to survive.

One good sign is that most middle market businesses are in the process of getting back to normal operations since the initial shutdowns. As of September 2020, more than half of middle market business owners say they are somewhat or fully back to normal operations and only 2 out of 10 report having to close more than once due to the pandemic.

COVID, recession fears, and political uncertainty impeding outlook

For those who have a poor, fair or good outlook of the U.S. economy, it’s no surprise concerns with COVID-19 continue to be the overwhelming reason for their sedate outlook. Concern with a potential economic recession has decreased from 67% to 58% since June but remains among the top concerns. Unsurprisingly, the volatile political landscape rounds out the top three reasons for a low outlook.

Markey observes that in the Eastern Region of the Country, which was one of the earliest and hardest hit areas of the United States, concerns about a potential second wave of coronavirus cases have dampened some companies’ plans or caused them to make more conservative projections.³

Slightly more business owners are anticipating a somewhat or very negative impact on their business due to political uncertainty – 35% versus 32% in December 2019 – but fewer are expecting to make changes as a result. Both Watson and Markey say clients are holding off on making aggressive moves until the political picture stabilizes. Meanwhile, contentious negotiations over a second stimulus bill are adding to the economic and political instability.⁴

Companies focus on diversity and inclusion efforts in response to civil action

COVID-19, however, is not the only game changer of 2020. As the country has confronted a generational public health crisis, it is also dealing with an eruption of social activism and civil unrest over systemic racial injustices.⁵ In response, most U.S. companies have placed a renewed focus on efforts to address bias in their own operations. While a majority of middle market businesses claim diversity and inclusion is very or extremely important to their company, their actions or planned actions are varied. Over the past 12 months, the most common actions have been strengthening anti-discriminatory policies (37%) and conducting diversity and inclusion trainings (33%).

Middle market M&A not back to earlier expectations

The state of the current economy has also extended to the merger and acquisition (M&A) marketplace for middle market firms. Fewer businesses have completed an acquisition in the past six months: 27% versus 35% in June. The overall likelihood of a middle market company completing an acquisition is also slightly down compared to earlier in the year. The majority of respondents (55%) say that the COVID-19 pandemic has somewhat or significantly impacted valuations, which may be what is dampening activity. However, Key’s regional sales executives are seeing some signs that M&A will pick up.

“Most of the activity has been with financial-sponsored groups, rather than strategic buyers, and they are picking up deals that may have been paused when the pandemic first hit,” said Markey. “We’re also seeing an interesting increase in business owners exploring ESOP (employee stock ownership plan) structures rather than selling to financial sponsors. It points to a more altruistic view of the company and employees.”