James Cassel: The middle-market is important, under appreciated

 

jcassel@casselsalpeter.com

The middle market is the principal driver of our labor market and economy, but it’s also the most misunderstood and least appreciated. Like it or not, it’s time for everyone to brush up on their understanding of this important business segment and certain key issues surrounding it.

Many fail to appreciate the significance or economic impacts of the middle market because the vague term “middle market” means different things to different people. Some say that companies with $5 million to $500 million in annual revenues are middle market, while others say companies with $50 million to $1 billion in revenues are middle market. Others define it based on the values of the businesses rather than their revenues. Based on our experience at Cassel Salpeter, an investment banking firm specializing in the middle market, we define it as any business with $10 million to $250 million in enterprise values. We do not base it on revenues. No matter what method or range you prefer to use, the numbers confirm that the middle market deserves our attention as it is the great economic driver of our economy.

Simply put, the middle market affects us all. If you’re a small company, middle-market businesses are probably among your most important customers. If you’re a large company, middle-market businesses are either your key vendors or constitute a large share of your customer base. They also supply many goods and services to consumers.

Middle-market businesses create more jobs than small and large businesses. In Florida, middle-market companies boosted employment almost nine percent and accounted for 45 percent of all jobs created in the state during the past year, according to the National Center for the Middle Market. A recent analysis of BLS data by Forbes shows that U.S. businesses with 50 to 1,000 employees created 1.8 million jobs nationwide between March 2011 and March 2012. These jobs accounted for more than half of all new jobs in the country and more than five times the number created by companies with more than 1,000 employees. This will only increase as confidence in the economy continues to grow.

In Florida in particular, the middle market is also important because it is a key driver for the state’s private equity investment market. In 2012, Florida ranked fourth nationwide in the number of private equity investments made, according to the Private Equity Growth Capital Council. Private equity firms invested $17.3 billion in 115 Florida-based companies last year, the data show.

When it comes to mergers and acquisitions activity, the middle market clearly takes the lion’s share in the United States in terms of number of transactions. This is often overshadowed by the headline-grabbing mega deals. Considering all these trends, we can expect private equity activity to increase throughout the balance of this year. The uptick in the economy will motivate buyers to look for high-quality businesses where they can invest their capital. Moreover, many private equity funds have legacy middle-market investments that might be ripe to liquidate with the improvement in the economy.

As the U.S. continues its path toward economic growth, middle-market businesses — particularly those in manufacturing, food and beverage, consumer products, financial services, healthcare, technology and new media — are likely to experience continued growth.

How do middle-market businesses attain this success? Simply put, they combine the best of both worlds. They enjoy the benefits of smaller companies (nimble, flexible, low operational costs, etc.) and those of larger companies (experienced senior leadership, proven track records, financial stability, deep market penetration, etc.).

Middle-market businesses are also entrepreneurial and often family owned. A recent survey from Deloitte Growth Enterprise Services shows that mid-market companies that identify themselves as entrepreneurial get almost 40 percent more capital investment, almost 60 percent more employee productivity and almost 50 percent higher profit margins.

What does this mean for business owners in South Florida? OPPORTUNITY. Some things to consider as you look toward the remainder of 2013:

How strong is your relationship with middle-market businesses, and how well-positioned is your business to seize new opportunities to partner with middle-market companies?

How should you modify your product or service offerings to meet the emerging needs and growth segments of middle-market businesses?

Should you consider marketing to new customers or clients within the middle market?

How can you position your small business to join the ranks of the larger, more established middle market?

As the economy continues to grow and opportunities continue to emerge, owners of small, medium and large businesses who take the time to understand, embrace and support the middle market will gain a significant competitive advantage.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. www.casselsalpeter.com

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