Too big to be thought of as "small businesses," too small to be "enterprise" — with less risk than the former, but more growth potential than the latter — middle-market companies resist easy classification.
The concept of resistance applies to middle-market companies in another way as well. To a remarkable degree, middle-market companies seem to float above the trends (especially downward trends) affecting the economy at large. For example, compared to peers both smaller and larger, they returned to profitability faster — and were ultimately the primary drivers of overall U.S. job growth — following the carnage of the Great Recession of 2008. And even while taking a hit during the global pandemic, middle-market companies nonetheless managed to outperform the S&P 500 by leaps and bounds.
As we transition toward full reopening, what's next for this small but influential subset of the American economy? One that, despite making up fewer than three percent of all businesses, drives more than 30 percent of total U.S. GDP? (To put that in context, if America's middle-market companies were a country, it would have the fifth-largest economy on the globe.) Let's survey the outlook among the middle-market leaders, paying especially close attention to the challenges and opportunities we can already see cropping up on the horizon.
taking the pulse: the middle market in transition
How to get a handle on the middle market at large — a cohort so notoriously hard to pin down? After all, besides the fact that middle-market companies typically have revenues in the $10 million to $1 billion range, most definitions hinge exclusively on what they're not.
Adding to the complexity and confusion, many middle-market companies are service-oriented businesses unknown to people outside of their industries or markets. Still others, like Patagonia and White Castle, are well-established consumer brands. How are these companies — familiar or otherwise — holding up in 2021?
For the most part, fairly well.
That isn't to deny the onset of the global pandemic adversely affected the middle market. It did, just as it did everything else. Nearly 60 percent of leaders at middle-market companies said they were forced to furlough or lay off staff members due to COVID-19, according to one study, with another 27 percent rolling back compensation packages or employee benefits in order to stanch their losses.
Meanwhile, although there aren't hard numbers indicating the extent to which middle-market companies took advantage of the $2 trillion capital infusion from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, there are signs relief was sorely needed. According to the same study, more than half of middle-market companies either sought loans or took out lines of credit during the pandemic, for example.
And yet, despite that adversity, the middle market is showing resilience once more, with some companies even reporting growth toward the end of last year. Where was the growth most pronounced? Data from Q4 2020 suggests that companies in the healthcare space accounted for the lion's share of middle-market growth, with those in the consumer, industrial or technology sectors not far behind.
Among middle-market leaders today, a kind of cautious optimism prevails — more cautious around some things, more optimistic about others. To be sure, it's anything but monolithic.
So where are middle-market leaders most bullish? And where, conversely, are they feeling bearish? Analysis from Chubb and the National Center for the Middle Market (NCMM) suggests the following breakdown.
- The overall economic forecast: Middle-market leaders are for the most part optimistic about the strength of national, regional and local economies — a very good sign.
- The specific forecast for middle-market companies: Nearly half of middle-market leaders anticipate overall revenue growth for their companies in 2021.
- The job outlook: One in three middle-market leaders say their companies will look to increase headcount throughout the remainder of the year. What's more, positive employment growth is expected for the middle market overall this year as well. However, the story may not be quite so straightforward as it seems here — after all, "talent management" was the second most common internal challenge cited in the survey.
- The value of tech and digital: Many of these companies saw firsthand during COVID-19 the link between advanced digital capabilities and bottom-line growth, and their leaders are acting accordingly, with IT capabilities ranking as the primary destination for capital expenditures.
- Organizational expenditures and investments in general: While middle-market leaders are eager to build more robust tech stacks, that eagerness doesn't seem to extend far beyond that. Many are still licking their wounds from 2020. Outside of IT investments, they're understandably moving cautiously — and being a bit stingy.
- Expansion: This shouldn't come as a surprise. COVID-19 drove a substantial decline in expansion-oriented actions across 2020 in the middle market. Meanwhile, many companies took on new debt. For middle-market leaders, the focus in 2021 is going to be more on consolidating existing footprints than expanding into new territory.
leadership challenges — and preparing for what's to come
The middle market continues to be exceptionally resilient in all the ways, and for all of the reasons, we have discussed. Time and time again, it seems that as the middle market goes, so too does the economy at large. Leading the way in recovery or resisting the worst of downward trends — these are among the things the middle market does best.
Nonetheless, there will undoubtedly be many new challenges, as well as new opportunities, on the road ahead. To cite just one: The fact that "talent management" would be such a pervasive worry among middle-market leadership, at the same time these leaders intend to increase headcount, invites speculation about the state of employee engagement and workforce management practices in place at some middle-market companies today. Whatever the underlying issue proves to be, the current situation hints that talent acquisition may be a heavier lift than expected going forward.
Time will tell.
Either way, having the right strategic partner — and having leaders with the right skill set to help you successfully navigate change — often differentiates companies that get ahead from those that fall behind. In fact, that's the reason so many middle-market companies continue to rely on the services of Tatum.
Want to see the difference for yourself? Contact us today and we'll get back to you ASAP.