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What is the Middle Market?

March 29, 2022

What precisely is the middle market? How do you know if your business falls into this category? Both are often asked questions, neither easily (nor consistently) answered. At the low end of the spectrum, you have what is referred to as “main-street” companies, typically below $5 million in annual revenue, such as dry cleaners, hair salons, and other “mom and pop” shops. At the other end of the spectrum, you have large multinational corporations exceeding $1 billion in annual revenue, typically the big names everyone knows – think Walmart, Netflix, Costco, Apple. In the middle of those two is what is referred to as the middle market. Middle market companies span many industries and have varying levels of growth. They are a critical sector of the U.S. economy – despite only representing around 3% of all U.S. businesses, they account for approximately one-third of private-sector GDP and employment.

Defining the Middle Market

The middle market is often defined using various metrics, such as revenue, assets, market capitalization, enterprise value, number of employees, among many others. While there is no universally accepted range for mid market price, we refer to businesses valued between $10 million and $1 billion as the middle market, comprising roughly 200,000 companies across the U.S.

The middle market is further sub-divided, comprising:

  • Lower middle market: $10 – $50 million in annual revenue
  • Middle market: $50 – $500 million in annual revenue
  • Upper middle market: $500 million – $1 billion in annual revenue

From a middle market M&A perspective, sub-dividing the middle market by this framework allows investment bankers to categorize middle market entities with more specificity to better determine the business’s fair value.

M&A Opportunities and Challenges for Sellers within the Middle Market

Middle market M&A can be a significant long-term growth catalyst for both buyers and sellers. With a pulse on the middle market and mid market price, M&A advisors, investment banks, and middle market business brokers play a vital role in connecting middle market companies looking to sell with potential acquirers. They work diligently to extract value in companies well beyond just their financials by drawing attention to the synergistic and intangible benefits.

Many companies in the middle market are privately-owned, and their financial information is not publicly disclosed or easily obtained. Middle market business owners are often faced with challenges in determining the value of their company. With these challenges, business owners often turn to M&A professionals who have the experience and expertise to help them determine what their business may be worth.

There are three standard approaches to valuation which are typically utilized in determining what a company may be worth.

  1. Asset approach – typically used in liquidations and asset-heavy companies
  1. Income approach – cash flow focused but excludes qualitative factors
  1. Market approach – looks to public company multiples and precedent transaction multiples, but there are comparability issues, and implied premiums are not tailored to the business

Utilizing a standard valuation approach will typically bring a seller 60% to 70% of the value, but it fails to consider valuation’s synergistic and intangible elements.

How Persient Adds Value

Persient approaches each client as ‘more than just a cash flow multiple’ business. Your business is more than just the numbers. By positioning and bringing attention to your business’s synergistic and intangible elements, we help clients unlock the remaining 30% to 40% of value in their company.

Unlike other firms and middle market business brokers throughout Southern California, we focus on fewer deals per year, allowing us to hand-select companies we can most effectively serve. We create genuine partnerships with our clients, dedicating time and energy toward a successful outcome. We are not a monolithic, “bulge bracket” Wall Street investment firm, and we do not aspire to be one. We take great pride in giving our clients an exceptional experience. Though we are based in Southern California, frequently serving businesses in San Diego County, Orange County, Imperial County, and Los Angeles County, our reach is global. Schedule a M&A consult to start the process. With Persient, you’ll never walk alone.

Investment banking services and securities offered through Independent Investment Bankers Corp., a registered broker-dealer, Member FINRA / SIPC. Persient LLC and Independent Investment Bankers Corp. are not affiliated entities. FINRA Broker Check.

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