The Increasingly Critical Role of Technology in Middle Market Business Transitions

As growing businesses that fuel the U.S. economy, middle market companies are constantly evolving. While the frequency of transitions in leadership, financing, or structure for these companies has not changed much over the past several years, the role technology plays in these transitions has. According to our latest data on major middle market business transitions, technology is now at the top of the list of transition drivers, transition success factors, and preparation activities in advance of a major business change. 

This isn’t surprising considering how important digital maturity is to middle market companies. These firms must compete with the resources of corporate powerhouses on one end of the spectrum and the disruptive nimbleness of startups on the other. The 2020 Case for Digital Transformation report clearly illustrates that digital vision and acumen are important drivers of a middle market company’s competitiveness, success, and  growth. Our current survey underscores just how much technical considerations are influencing the middle market business transition landscape. 

Acquiring new technology or expertise is a primary reason for middle market business transitions. 

Middle market companies undergo changes in leadership, financing, or structure for a myriad of reasons that range from growth objectives, to the owner’s personal aspirations, to simple opportunism or advantageous market conditions. Almost always, multiple factors influence a decision of such magnitude. 

But when it comes to the top mention of primary drivers for the most recent business shift, acquiring new technology or technical expertise is second only to increasing market share. To some degree or another, technology has factored into nearly a quarter of all middle market business transitions initiated in the past two years. The same proportion of companies say it will be a driver of their future changes. 

The acquisition of new technology defines business transition success to a greater extent.

 
Whether or not middle market businesses embark on changes specifically in search of new technologies, the acquisition of digital capabilities is a top factor in accessing the ultimate success of the change. This was true several years ago when we fielded our first Preparing for Major Business Transition survey. It is nearly doubly as true today. 

In the pre-pandemic report, just 23% of businesses experiencing transition between 2015 and 2020 cited the acquisition of new technology as a positive outcome of the business change. Since then, technology has climbed the ranks and is now second only to increasing revenues as a success factor in middle market business transitions. Among businesses that have transitioned in the past two year, nearly half (45%) list technology gains as a positive outcome. Among those planning a future business transition, 48% say they expect technical advances to be a key element of success. 

A company’s current technological capabilities can present hurdles in the transition process. 

Companies clearly have significant technological gains to make when they transition. Leading up to the change, however, technology can be more of problem area than a benefit. 
Cybersecurity was the number one most worrisome issue for middle market companies during their past transitions with three out of five leaders saying that protection of data weighed heavily on their minds. Leaders expect the issue to be a key concern in future transitions as well. 

Upgrading technology systems is the most common action taken to prepare for a business transition. 

Preparing for business transition takes considerable time and effort. Middle market companies typically spend the year leading up to the transition engaging in a variety of tasks that include assessing value and risk, organizing paperwork, consulting with advisors, and upgrading standard operating procedures. The most popular effort during this time, however, involves IT (Information Technology) system upgrades. These activities will become even more prevalent as companies prepare for future transitions. 

Given the high level of concern related to cybersecurity, it is not surprising that most companies do or will increase data protection efforts in advance of a leadership, financial, or structural shift in the business. A significant proportion of firms also engage in auditing IT systems, installing new anti-virus or firewall software, and implementing stronger password tools. More than a third of companies build up their IT staffs. 

One data protection effort is becoming increasingly popular among middle market companies. While 26% of companies experiencing a past transition implemented multifactor authentication as a way to improve cybersecurity, 36% of companies planning a future transition indicate that they will take this step. 

Nevertheless, despite considerable effort to enhance data security, a majority of middle market business leaders say that they remain at least somewhat vulnerable to a cyberattack during the business transition process. 

Technology goes hand-in-hand with middle market business transition.