Middle market companies, usually defined as businesses with revenues between $10 million to $1 billion, are seen as having the best of both worlds in the eyes of professional service firms.
First, similar to smaller businesses, the decision-making process at middle market companies is quick because one usually deals directly with principle owners of the firm. This is in contrast to larger public corporations in which the decision-making process takes a longer, multilayer, hierarchical route towards an answer.
Second, middle market companies can usually deliver the financial resources to facilitate expansion and growth plans as large corporations do versus smaller companies.
Because of these and other factors, they are attractive to financial, accounting and law firms in the professional services realm.
For Philip McGovern Jr., managing partner at the law firm of Connell Foley, the middle market offers a “just right” scenario. “It’s kind of a sweet spot for companies,” he says, explaining that Connell Foley’s middle market clients have the resources to bring in a wide variety of advisors to discuss their problems.
“They are typically represented by established accounting and law firms, and have high-end banking relationships. Because many middle market companies are family owned, they are also loyal clients and tend to stay with us for many years,” McGovern says.
Myron Gellman, managing director at accounting firm Mercadien, says the middle market is “enormous. There are hundreds of thousands of companies with revenues between $10 million, up to $1 billion, across the country. So, the volume in that space is great.”
According to a March 2019 article titled “Masters of the Middle Market Universe” which appears on the website Strategy + Business, there are approximately 200,000 middle market companies in the US. They account for roughly one-third ($5 trillion to $6 trillion) of total US private sector GDP.
Of course, these figures are from last year. According to The National Center for the Middle Market, the COVID-19 pandemic has negatively affected this market, but there are signs of improvement.
The organization’s “COVID-19 and the Middle Market” survey of 1,000 middle market financial decision makers taken between June 1 and June 12, reveals that only 2% of respondents expect revenues to grow over the next 12 months, vs. 4.9% at the end of 4Q 2019. However, the 2% is better than a 1Q 2020 survey in which 78% of respondents said revenue growth will decline over 12 months.
Commenting on the pandemic’s impact, Bill Ruckert, senior vice president, senior relationship manager middle market lending, Provident Bank, says, “There is so much uncertainty not only among our clients, but with the people with whom they are doing business,” he says.
Ruckert sees people beginning to go back to their jobs, but he questions if the entire workforce will return, or if the supply chains will be able to meet customer demands.
At this time, Provident is being proactive and is in constant communications with all of its business customers, including those firms in the middle market. “We are giving loan deferrals, we are looking to make modifications on loan requests, and we are looking at businesses’ cash flows to see what they can support on an ongoing basis,” Ruckert explains. He says that financial projections are difficult for clients to make at this time because most businesses have been closed these past 90 days. “There have been no revenues, just expenses, so you don’t have the data to make projections,” he explains.
However, business owners want to get back to work and pay their bills, Ruckert continues. “They want to get their employees back to work. That willingness is encouraging from the banker’s perspective,” he says.
Helping make revenue projections during this pandemic are accounting firms such as Mercadien, where Gellman explains his firm is helping clients stress test their financial models.
As an example, Mercadien may have a client undertake a stress test that looks at a 10% – 30% reduction in revenues. “What does that mean to the business, not just financially, but in terms of budget, head count, their bank covenants, etc.?” Gellman says. “How do they adapt and change to these different scenarios? … We get them to think differently about their business so they are prepared for any contingency.”
He adds that most middle market companies are “extremely” optimistic, but they have to be conservative in their planning: “You must plan for the worst, but expect the best. We can walk them through a process to do that,” he says.
At Connell Foley, McGovern comments that the needs of the middle market during this pandemic revolve around many factors including employment issues such as furloughs and layoffs, compliance with the Small Business Administration’s Paycheck Protection Program (PPP), dealing with vendors and landlords, deciding on whether to go forward or not with an acquisition … “It’s things all businesses are grappling with: Trying to figure out how to at least keep moving sideways – if not forward – and maintain the status quo until we get past this pandemic,” he says.
Besides the advice and assistance being given to middle market companies that impact their financial numbers, Mercadien’s Gellman says that managing culture, as more people work remotely, is another challenge. “With many people working from home, how do you navigate through a sense of isolation employees may have?” he asks.
Mercadien has been trying to overcome this obstacle by holding Zoom meetings with employees and clients. “Consulting takes on a completely different dimension when you actually see someone on the other end of the connection,” Gellman says, adding: “What is interesting is that the future showed up five years earlier than expected due to the various technologies being used during the pandemic.”
At press-time, COVID-19 cases are spiking in numerous states. There are also fears that New Jersey will see a second wave of the illness as early as this fall or as late as next spring. Already, Governor Murphy has rolled back a segment of his Stage Two reopening plan by stopping indoor dining at restaurants.
No one knows what is in store for businesses over the next year, but Connell Foley’s McGovern is optimistic about the long-term outlook.
“I believe that Americans generally resort back to the norm after times of crises. The other neat thing about this country is that it was founded by risk takers. Everyone who has had some modicum of success in the US has, to some degree, taken a risk. Even in the current situation, there is a good degree of risk, but I think American businesses will assess, address and adapt to that risk until some type of vaccine or therapeutic is found. We will find a way to go forward and be better because of it.”
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