Middle market companies receive less attention compared to the massive enterprises and small startups that often make the headlines. But what are they exactly? Unlike multi-billion dollar enterprises, middle market companies don’t always have the cash flow to spend on expensive consulting services. But consulting firms should still pay attention. Why? Middle market companies often serve as the acquisition targets (or clients) of bigger players. Consultants working for an enterprise-level client often find themselves working on middle market M&A. Let’s dive into a discussion on middle market companies.
What Is Middle Market?
Middle market companies aren’t small enough to be “sexy,” Silicon Valley, venture capital darlings. And they aren’t big enough to make CNBC headlines with stock price movements. From a revenue perspective, middle market companies are anywhere between $10 million and $1 billion. In the US, those parameters capture roughly 200,000 companies that account for a third of the country’s private-sector GDP. That’s a big piece of the output pie! When it comes to sheer number of firms however, the vast majority of employers in the US are small businesses. In fact, the SBA Office of Advocacy estimates that small businesses comprise 99.9% of all US firms. Put simply – middle market companies may be outnumbered, but they provide a whole lot of economic value.
Importance Of The Middle Market
The middle market plays a critical role in the American economy for a couple different reasons. First and foremost, these companies drive the job market. Investopedia estimates that the segment encompasses about 30 million jobs in total. Sometimes these jobs are less visible because middle market companies provide a lot of business-to-business (B2B) services. Think manufacturing, energy, shipping, and such. The second important role of middle market companies is in capital markets. Investors see a lot of opportunity in the middle market because companies occupy profitable niches that translate into big returns. And middle market companies welcome capital infusions since they don’t have the cash flows of bigger businesses. This dynamic has led to the emergence of many middle market investment banks and middle market private equity firms. Check out lists of the top ones here and here, respectively.
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Middle Market Companies
To give you an idea, here is a sampling of middle market companies from a range of industries:
The well-known provider of internet-based mailing and shipping services did $571 million in revenue in 2019.
The popular consumer-facing survey app and website pulled in $375 million in revenue in 2020.
The original go-to present for that special someone on Valentine’s Day. The company did $340 million in revenue in 2019.
A competitor to payroll giant ADP with $560 million in 2020 revenues.
A popular company in the “EdTech” space does around $600 million in annual revenue.
Not the drink. Lemonade is a disruptive digital insurance company that did almost $100 million in the first year after IPO’ing in 2020.
Consulting Firms’ Connection To Middle Market Companies
Middle market investment banks and middle market PE firms help mid-sized companies with financing, which leaves consulting firms to help with the strategic side of acquisitions. As we mentioned, the most profitable clients for consulting firms are bigger enterprises with deep pockets. But when these “big fish” clients acquire middle market companies, consultants work to ensure a smooth integration for both sides. That’s not to say that middle market M&A is the only touchpoint for consultants. Firms will also help conduct pre-acquisition due diligence work on potential middle market company targets. Additionally, some research suggests that mid-sized companies will start spending more on consulting services in the coming years. If demand does increase, consulting firms will need to think about how to tailor and customize different service offerings. If the pandemic has taught us anything – it’s that a firm is only as good as its ability to adapt!
Middle market companies represent an interesting segment of the business economy. They sit at that critical point in the life cycle where a business either floats or sinks (for additional reading on this phenomenon, check out Strategy Beyond the Hockey Stick, written by McKinsey Partners). And that is what makes them so tantalizing to investors – the potential for outsized returns in the long run.
For consulting firms (at least historically), middle market companies haven’t been the number one priority. They don’t typically provide the kind of repeat business that consulting firms rely on. But the middle market does provide the consulting industry with a lot of business indirectly through M&A activity. This promises to continue, given the increasing amount of consolidation across industries. Take the oil and gas space as a case in point. Consulting tends to mirror economic trends. As the middle market grows, so too will the need for middle market consulting.
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