Posted on: December 13th, 2016
Defined as businesses between the ranks of “Main Street” and multi-national companies (between assets of $5 million and $500 million, or between $100 million and $1 billion–depending on the authority you talk to), the middle market is a large share of the American economy.
Caught between the entrepreneur class of small and medium business and the Fortune 500 powerhouses, this sector represents about one-third of private sector GDP and employs about 25 percent of the total labor force.
It is important to distinguish between the lower and upper middle market companies because there are different buyer groups for each level of middle market companies. Investment banks tend to specialize in business at each rank.
Premiums are typically paid for business that can pass into higher middle market strata.
Growth has its own problems
Middle market companies, optimistically, are largely worried about how to manage growth. While the financial environment has dramatically improved since the 2008-2009 crisis, the current financing market is widely regarded as “variable or unpredictable.”
Capital is available often through new capital providers formed to replace those that left the marketplace. Capital is available, but it is more difficult to find and lock in.
Middle market companies face skill shortages as finding personnel is a surprising challenge. The National Middle Market Summit Report noted “Only about half of ‘growth champions’ say they have both access to the skilled workforce necessary for their organization and the recruiting power to attract that talent.”
The Expansion Conundrum
Middle market companies combine scalability with flexibility and so have become the companies to watch. Middle market companies are usually privately owned.
They are often the leading global or national providers of a unique product or service. Expansion often endangers the flexibility of a middle market company and can take away the special nimble quality that it has.
Introduction of new products or geographic expansion presents leaps into the unknown. Many middle market companies are concerned with setting their balance between stagnancy and risk.
They have to estimate if the current economy, with its slow growth, can support a much desired expansion. They are concerned about the costly process of developing a new product as interest rates may rise and as the dollar continues to strengthen against international currencies.
The financing of expansion is an important consideration when risks are high. Banking partners may be engaged carefully to establish how much capital is needed and how much is available.
Does the company have enough reserves to weather a drop in prices? Does the company have enough staff with the necessary skills to create change? What if the new product fails to catch on, or the catch-on takes too long?
An entrepreneurial sector
Most middle market businesses are driven by the entrepreneurial energy of passionate owners. Innovation is the engine of their growth.
This environment tends to welcome experimentation and risk-taking, because failure to innovate can often mean failure to survive. However, many of these companies can be unstable because the economy lacks access to capital to fund their growth.
The challenge for many middle market companies is how they can stabilize and become mature companies without stifling innovation. The answer is attracting the best talent.
Mid-sized organizations can offer the best of both worlds, under the right circumstances. They need to innovate to stay on top and welcome innovation at all levels of the business.
Through offering top tier talent an exciting innovative work environment, they can build a strong foundation for future growth.