Episode 3: Middle Market Update: July 2020 Edition

Episode Summary

It is "easy" to watch the stock markets to see how the public markets are doing - understanding which metrics to watch to understand the health of the Middle Market is a little trickier. In this episode, we explore data and insights on the current state of the Middle Market.

Episode Transcript

Stephanie Chambliss Gaffin : 0:00

Welcome to Right in the Middle Market. On today's episode, we're going to give a middle market update for July 2020. I'm very pleased to be here with Mark Gaffin today, who's going to help walk us through some of the key things that he's seeing in the market, and about what that means specifically for the health of the middle market. Welcome to Right in the Middle market, a podcast about pragmatic perspectives on running, growing and selling your business. We talk about the challenges decisions, and most importantly, the actions business owners can take to create long term value in their companies. Welcome to Right in the Middle Market. On today's episode, we're going to provide an update on the middle market specifically and I'm delighted to have Mark Gaffin here with us to talk us through some of the key data points that he's seeing in the middle market economy, and what that means for a small to medium sized business. So Mark, I know we've seen a lot of volatility in the stock market. But what would have to be described as least some promising upward trends and the major indices? What is your sense for where we stand today in the US economy broadly, and the middle market specifically?

Mark Gaffin : 1:14

Thanks, Stephanie. Yeah, look, typically the data is a bit of a mixed bag. The middle market, as we know, is incredibly important part of the US economic engine. So we can take some cues for how the middle market is doing by looking at macroeconomic data. It can be challenging to isolate and actually see the positive data. So let's kind of start there. From a positive standpoint, you know, the Wall Street Journal reported last week that the Commerce Department had us retail sales, which includes purchases at stores, at restaurants on online, reaching $524 billion. That's a seasonally adjusted increase of 7.5% over May, and in dollar terms that brings the US economy really back to pre pandemic levels with June 2020 actually about 1.1% above June 2019. Another positive, The Wall Street Journal also reported this week that the Federal Reserve said, "Industrial Production rose a seasonally Adjusted 5.4% in June from May", which beat the 4% rise anticipated by economists surveyed by the Wall Street Journal. So there's evidence that shoppers are shopping and producers are producing. Certainly a ways ago, but there's evidence that consumer feels that as well. In fact, the Conference Board showed their Consumer Confidence Index increased rather dramatically in June. The current index stands at 98.1 up from 85.9 in May. Another Conference Board survey, the present situation index, which is based on consumers assessment of current business and labor market conditions increased to 86.2 from 68.4 in May. A potential counter to this, of course, is the noisy and sometimes conflicting data in the jobs market. And certainly from the COVID cases, and hospitalizations. And Stephanie, I know you've got a lot of experience in the sector, what are you seeing? What's your take on that?

Stephanie Chambliss Gaffin : 3:24

Well, as, you know, I spent most of my career in the healthcare industry. And when we think about hospital utilization, the first thing I would say is that most hospitals have used that data that they have, and they certainly have that data readily available. It's a key metric that most hospitals and health systems are watching on a day to day basis. But it was never really designed in a way to be consistently measured and tracked across different organizations. And so it can be a little bit tricky to try to add that up across a metropolitan area or certainly across the state or national level. So that would be the first thing, I think you have to take that into account a little bit. Specifically, when you're getting into specific bed types, ICU's versus regular beds. The second thing that I would say is that most hospitals typically operate, at least in the upper 80s in terms of percent capacity, percent utilization, if not the low to mid 90s. That's a very healthy level for hospitals to be, matter of fact, if they're not having inpatient capacity in the upper 80s, low to mid 90s, they're probably not doing very well financially because they're not going to have the revenue that they need to keep the organization alive. So when these numbers are being reported, I think it's really important to dig down to say, are the utilization numbers in hospitals going up because the hospitals have started to do elective procedures again, or is it because we actually are seeing COVID related admissions. That is not always clear, at least what I've seen, is being reported in the media. So, Mark, I knew that you as part of our consulting practice as part of what we do in our financial advisory services, you're talking all the time with small and medium sized business owners. And this is a trite question, but I'm going to ask it anyway. How would you summarize what's keeping middle market CEOs up the most right now?

Mark Gaffin : 5:23

Well, gratefully, it feels like there's a much better perspective today than just even a few short weeks ago. The National Center for the middle markets June survey of about 1000 decision makers noted that one in eight, middle market executives still believe that COVID-19 will be catastrophic. Now the good news is that down for 25% in March. In talking with our clients and solution partners, it feels like middle market leaders, leadership teams are still working through a lot of the internal things that they have to deal with and that's hiring, staffing, internal communications in morale and the like, are still very much a high priority. And of course, you know, we as a firm have pivoted to help companies address liquidity issues in helping companies manage interactions with their capital providers, both debt and equity capital providers.

Stephanie Chambliss Gaffin : 6:19

Do you feel like middle market companies have been able to access the capital that they need, either through existing relationships or through new channels like the paycheck protection program?

Mark Gaffin : 6:29

Well, never as many as I'd like to, but we were able to support both for profit and non for profit clients navigate the payroll protection opportunity, as well as some of the other programs that are out there. And I'd be remiss if I didn't give a shout out to some of the small to medium sized commercial banks who really stepped up to support middle market clients. As you know, we keep an open dialogue with hundreds of senior lenders, both banks and non banks across the country, and I personally was on the whole very, very impressed by the response. We consistently coach our clients to appreciate, but evaluate their debt capital providers. And this is where that old saw dig a well before you're thirsty can be everything. But again, by and large, I'm optimistic here. As always, it's important to be proactive, and to stay ahead of communications with all capital providers. I started in commercial banking years ago, and I have yet to find a commercial banker that likes surprises. Over the past several months, we have used many of the tools that we typically use in turnaround engagements to bolster short term and medium term cash flow projections, to look proactively for sources of liquidity, whether that's accounts receivable, asset management and the like. And quite frankly, to keep pushing on sales and marketing execution wherever possible to keep revenue moving. Data suggested about 60 to 70% of middle market companies sought some type of financing, with a little over half of firms receiving something, whether that's payroll protection programs, or lines of credit for the banks or term loans.

Stephanie Chambliss Gaffin : 8:09

Small and medium sized business owners are typically are pretty tough and optimistic bunch. What are you hearing that middle market leaders are seeing ahead?

Mark Gaffin : 8:19

Much like the macroeconomic information, this is still a bit of a middle, mixed bag. Right? If you think aeons back to January 2020. The big problem then was hiring people. How can I find qualified people to help us grow? And unemployment at that point in time was rock bottom across all major categories. When the National Center for Middle market was surveying people then coming into 2020, executives were very bullish on both growth in revenue growth and unemployment. I think they were looking at 4.9% and 3.5% respectively. Half of all companies at that time, were looking to enter new markets, and actually one in four companies were looking to build or expand in new facilities. And while those expectations have been tempered a bit now, still one third of people are looking to enter new markets. And a meaningful number are actually still, at this point looking to expand facilities. We of course are working very, very closely with our clients to be optimistic and to keep an eye on their competitors. As they say, watch your six.

Stephanie Chambliss Gaffin : 9:27

Mark, I'd love to talk a little bit more about this concept. It sounds like there are a lot of companies that are looking forward and trying to find those areas of growth. Let's continue that conversation when we come back from a quick word from our sponsor. Right in the Middle Market is brought to you by the Gaffin Group, a full service business consulting firm. The Gaffin Group works closely with middle market companies tackling the big challenges of today's environment, in capturing the value enhancing growth opportunities of tomorrow. Too often dogma, platitudes or wish list get confused with strategy, then it's no small wonder that execution can be muddled. The Gaffin Group principles work closely with company boards, executives and their teams to seek pragmatic, tangible results. They provide comprehensive advisory services across strategic, financial, operational and merger and acquisition capabilities. All framed by the fundamental belief that real strategy drives real results. The Gaffin Group is focused on delivering robust practical insights and fact based pragmatic solutions. Their services are designed to support their clients profitable growth and sustainable long term value creation. Go to Gaffin group comm to learn more about how the Gaffin group can help you and your company. Welcome back. So Mark, just before the break you were talking to us about what you're seeing how companies are still seeking to find growth opportunities in this environment. Tell me a little bit more about what you're seeing and the companies that are still looking for ways to grow right now.

Mark Gaffin : 11:10

Well, I absolutely agree with you. I mean, both professional investors, and middle market business owners that follow dislocations, this is a time of other opportunities in this time of dislocation. The data points to 40 to 50% of middle market executives feel it's going to take five to seven months to get back up to full capacity. But there's a lot of diversity in that opinion, some people think it'll happen sooner, something so you app, it'll take longer. And that divergence of opinion is exactly where opportunity lies. We have and are currently working with middle market founders and management teams that were executing or contemplating exits, for a variety of reasons, and I can't think of any of those cases that don't still work now. Our team has been engaged with investors, ranging from well established private equity groups to search funds, from large family offices to independent sponsors, people are finding ways to get deals done.

Stephanie Chambliss Gaffin : 12:11

Mark, as you know, this podcast is designed to be all about pragmatic advice and action for business leaders in the middle market and those who advise them. So let me put you on the spot, what are two actions that business leaders in the middle market can take right now, if they've been trying to figure out how to respond to what's happening in the environment?

Mark Gaffin : 12:34

Well, of course there are obvious complexities across industries and across competitive dynamics within market segments. And there's obviously going to be unique challenges even at the individual company level. Let's think about some kind of a survive, sustain thrive continuum. So on surviving, right, there's still companies out there fighting an existential battle, they're working on cash flow challenges still, as we speak, they're working on finding sources of liquidity. I had the opportunity to work with the special assets turnaround group of a major commercial bank back in the global financial crisis, I have kind of a good perspective on how you work with commercial banks. So we work hard with those companies that are still working on survival. To present the client, there are clients prognosis and plans in a way that allows capital providers to kind of fairly evaluate the situation. That analysis and ongoing communication will remain critical for those folks till they regain better footing. On sustaining, these are companies that are kind of at that next phase of recovery, right? They've found that liquidity, but they're stuck, you know, there are a little frozen where they are. But they know that sitting still is in fact not viable, and it's critical to clearly examine the present state. Say you have a portfolio of businesses that determine their viability, the return on investment, and the strategic value in these times in the times to come. This is a driver for why we've seen optics and divestitures of business units and past dislocations. And there are buyers out there. But it takes some time to work to make sure these divestitures are appropriately valued and marketed. And then the last part is on thriving. These are companies that have entered the COVID shut downs with better balance sheets or liquidity positions. But importantly, these are business leaders that recognize now as a time of unprecedented opportunity. As you know, their competitors might be hunkered down, this is the time to move. And a previous dislocation, some competitors, in concurrence with their cost saving programs that they've done in this dislocation, actually are able to move forward on aggressive pricing or financing deals with their customers, right? Doing something to actually maintain or take market share in this type of environment.

Stephanie Chambliss Gaffin : 15:11

Okay, so that was a lot of great advice, boil it down for us across all the different situations that a company might be in whether they're looking for survival, sustaining or thriving. Two actions that business owners can take.

Mark Gaffin : 15:26

So it's certainly internally, making sure that you're communicating with the sources of capital, and making sure that you're evaluating those people. You're trying to make sure that the people that are providing capital have the communication that they need, and you have that same information internally, so that everybody's rowing in the right direction, internally. Externally, my recommendation and this is what we're telling our clients that are actually seeking this out, is to find opportunity. Evaluate that opportunity and seize it. This is a time to be looking forward, not just down at the dashboard.

Stephanie Chambliss Gaffin : 16:01

You have been a champion for the middle market for years. And it sounds like you're still bullish on the middle market. Is that true?

Mark Gaffin : 16:10

It is and I could not be more so and I don't want to for one second diminish the heartache and challenge that this healthcare crisis has presented, and it still presents. But I've been around long enough to believe it's a fool's errand to underestimate the US economy or the mighty middle market. It would be a worthy topic in and of itself, to talk about the resilience and impact of the middle market. But I believe that sometimes, irrespective of the overwhelming noise in discord, we have businesses to run, people to employ and customers to serve. We see our clients driving to excel in this environment. What was it that Rudyard Kipling said, if you can keep your head when all about those are losing ears.

Stephanie Chambliss Gaffin : 16:57

I love the poem, it's certainly an apt thought and construct for these crazy times. Thanks Mark, for great concepting and perspective on pulling together what we're seeing in the middle market and how middle market business owners in particular can look at the environment around them and think about what that means for running their own businesses. I'm Stephanie Chambliss Gaffin and you've been listening to Right in the Middle Market, a podcast about running, growing and selling your middle market business. We'd love to hear your comments on today's episode or ideas for topics you'd like to most hear in the future. Send me a message on LinkedIn or drop me an email at podcast@gaffingroup.com. Until next time, be well and be courageous.