Business writers often write about something called the “middle market” of companies. But what is the middle market of companies? This group of companies is variously defined as companies with revenues:
- Between $5 million and $3 billion (Wikipedia)
- Between $50 million and $1 billion (Investopedia)
- Between $5 million and $500 million (CNBC.com)
Forbes.com defines the middle market by employment, considering the 200,000 companies with employment between 100 and 1,000 to be the middle market. Based on experience, many non-national bank lending departments would probably define the middle market as companies with revenues between about $5 million and perhaps $50 million. And on….
Therefore, the so-called middle market represents companies that lie between two extremes – quite small companies on the one hand and very large companies on the other. Where the middle begins and ends is a matter of perspective and opinion. In this post, we take a stab at putting some additional perspective on the concept of the middle market.
Distribution of Companies by Revenue Size
Every five years, the U.S. Census Bureau conducts an analysis of “Statistics by Business Size.” The latest study currently available is for 2007. Perhaps the 2012 analysis is still underway. This analysis provides one means of looking at the middle market.
There are more than 6.0 million “firms” in the United States, of which some 1.3 million have revenues of less than $100 thousand per year. Most of these consist of individuals who work in their own “businesses” without any employees. While important to the economy, these very small firms do not enter into the discussion of the middle market.
As seen in the table above, there are some 3.3 million firms with revenues between $100 thousand and $1.0 million, of which about 900 thousand have revenues between $500 thousand and $1.0 million. Most of these firms have some or even several employees and are sometimes referred to as “mom and pop” businesses, because they are often run by families.
The next group of firms have revenues between $1.0 million and $5.0 million. Firms with revenues up to $2.5 million dominate this group and there are just over 300 thousand firms with revenues between $2.5 million and $5.0 million. I refer to these companies as “in between” businesses. They are in between the group of “mom and pop’ companies that are smaller and the next category of companies on the right side of the chart.
For purposes of this post, I’ve referred to the 350 thousand companies with revenues between $5.0 million and $100 million as the “middle market” of companies. More than 80% of middle market companies, as defined here, have revenues of $25 million or less. So less than 20% have revenues of between $50 million and $100 million. To put numbers on these ranges, there are 289 thousand companies with revenues between $5 million and $35 million and only 62 thousand companies with revenues between $25 million and $100 million.
The last category in the table is called “larger companies.” There are only about 21 thousand of them. The Census Bureau provides no further delineation of the distribution by revenues in this category, but they represent companies with revenues exceeding $100 million up to the largest private and public companies in the nation.
Middle market companies are sandwiched between the largest companies in America and the “mom & pop” and “in between” companies in the table above.
What Markets Does this Blog Address?
Over the last 30-plus years, I have worked with business owners in all four categories above. In the early years, as a very small shop, we occasionally worked for companies with less than $1.0 million in revenues and more often, with companies in the “in between” category above with revenues between $1.0 and $5.0 million.
As our business and its reputation grew, our clients grew in size and complexity. Today, virtually all of Mercer Capital’s clients are in the middle market or larger company categories in the table above. For many years now, my personal clients have been almost all in the upper middle market and larger company categories.
When I write about business ownership and management transition, I’m primarily addressing the middle market and larger company categories, because that is where my recent personal experience lies.
A Few Observations
Use of a term like “middle market” to categorize companies may be helpful to writers in national publications. They are looking at ways to describe the world, as are companies who do business with other companies. However, in reality, few business owners think of their companies as “middle market” businesses. Each business is otherwise defined by things like:
- Industry. Every business is located in some broad industry category that defines the general nature of what it does.
- Industry niche. Within broad industry categories, companies are defined by the niches they occupy.
- Size. Business owners are always aware of their size, but not in relationship to some nebulous “middle market” concept. Companies are always compared with other companies in their industry or niche based on size, profitability, and many other factors.
- Location. Some companies, even some quite large companies, are defined by local or regional markets in which they operate. Other companies whose business is national in scope, are focused on that fact.
- Lots of others….
There are no “middle market” industry associations that I am aware of. However, every industry and many industry niches have associations focused on informing, training, educating, and more for their members.
The so-called “middle market” is one that it can he helpful to have an understanding of if we read the press; however, the term is not defining for any company.
What we know about middle market and larger companies is that each one is defined by its business and markets. We also know that one thing they have in common is that all of them need to work on things like I write about in Unlocking Private Company Wealth that have nothing to do with the particular business they are in, including:
- Complex ownership. Most middle market and larger companies have more than a single owner, even if the owners are in the same family. But most such companies are not really “family” businesses, having non-related owners in their ownership groups.
- A need for workable buy-sell agreements. With valuations ranging from millions to many millions to billions of dollars, companies and their owners need to have buy-sell agreements. Because most existing buy-sell agreements will not work when triggered, I’ve written Buy-Sell Agreements for Closely Held and Family Business Owners. Buy-sell agreements are an important ownership transition tool. So owners need to know what will happen if their agreements are triggered. For instant learning about buy-sell agreements, try my Kindle book, Buy-Sell Agreements for Baby Boomer Business Owners. It is priced at only $2.99 to encourage you to download it today.
- Management transition planning and execution. Baby boomers are disproportionately represented in the ownership of middle market and larger companies.
- Ownership transition planning and execution. Every owner’s position in a private business will transition to someone else over time. This will occur voluntarily or involuntarily, or as a colleague says, whether we are vertical or horizontal.
- Management of private company wealth. Owners of middle market and larger companies need to focus on managing the wealth created by their businesses. Some think that by managing the businesses themselves, the owners are managing wealth. I strongly disagree. This private wealth needs to be managed with the same degree of attention, focus, integrity and respect accorded to the management of liquid wealth, including retirement funds and other liquid assets.
- Lots of others…
You may be a “middle market” company business owner, but you don’t define yourself this way. But having reached a certain level of size and complexity, there are matters other than directly related to the business that must be attended. It is appropriate and necessary to pay attention to these needs.
You may be an adviser to business owner clients who are in middle market companies, but you shouldn’t define them this way either. However, it is entirely appropriate to recognize that by the time companies reach certain size thresholds, they will have needs like those outlined above and more. You need to help your clients address these needs.
As always, please do comment on this blog. Or call me (901-685-2120) or email me (email@example.com) to discuss any valuation-related matter in confidence.
Until next time, be well!