Do You Have a “Middle Market” Business?

Earlier this month, I completed the Certified Merger & Acquisition Advisor® credentialing program of the Alliance of Merger & Acquisition Advisors® held at the Thunderbird School of Global Management in Glendale, AZ. I especially enjoyed the M&A Overview segment taught by Chris Blees, Managing Partner of BiggsKofford Capital in Colorado Springs, CO. In that segment, Chris gave a capital markets segmentation overview.  Chris broke down the segments into 1) small companies (up to $5 million in annual sales), 2) middle market ($5 million to $1 billion in annual sales) and 3) large companies (over $1 billion in annual sales and almost entirely public companies). For the purposes of this article, we will take a look at the distinction between small companies and the lower-middle market (a subset of the middle market category):

  • Small Companies
    • Annual sales of less than $5 million
    • Earnings before interest, taxes, depreciation & amortization (EBITDA) usually less than $500,000
    • Over 5 million small businesses in the United States, representing 15% of GDP
    • Almost always owner-managed with ownership goal of providing a comfortable lifestyle
    • Financing usually obtained from business banking divisions of community banks or smaller regional banks
    • Access to private capital markets primarily limited to the Small Business Administration
    • Business brokers are normally best choice for assistance with the business transfer process
    • Valuation normally 2-3x EBITDA
  • Lower-Middle Market Companies
    • Annual sales between $5 million and $150 million
    • EBITDA size of $500,000 to $15 million
    • Represents the lower segment of the vast middle market
    • Approximately 300,000 middle market companies representing 40% of GDP with over 90% of these companies being in the lower-middle market
    • Can be owner-managed or professionally managed with ownership goal of providing a comfortable lifestyle as well as entity wealth creation
    • Financing usually obtained from commercial banking divisions of regional banks
    • Access to private capital markets improved but varies greatly based on each individual situation
    • Business transfer assistance normally provided by an M&A intermediary or private investment banker
    • Valuation range:  4-7x EBITDA

Oftentimes, the market will help determine a business’ market segmentation based on the company’s overall characteristics. Market segmentation is important in determining valuation, capital access, exit options and what type of professional will most likely assist in a transition. As shown above, moving up the segment ladder usually means increased valuation. How does a business owner go about doing this? A good start would be to focus on building a functional organization (that is not heavily dependent on the owner) and increasing profitable sales.

*  Marks, Kenneth H., Slee, Robert T., Blees, Christian W., Nall, Michael R. (2012)  Middle Market M&A Handbook for Investment Banking and Business Consulting (United States:John Wiley & Sons, Inc.)




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