What’s a ‘Main Street’ vs. a Middle-Market Company?

Is your business a “Main Street” operation or a middle-market business?

When it comes to selling your company, the distinction is important.

The degree to which your business is considered a small or mid-sized operation will have a profound impact on how your business is valued and on the most effective process for getting it sold. The primary difference between the two marketplaces is who the ultimate buyer will be and their objectives in making the purchase.

On Main Street, you’ll primarily find “mom and pop” businesses such as restaurants, coffee shops, landscaping companies, auto and truck service centers, convenience stores, most franchises, and small businesses that offer services. Buyers perceive Main Street businesses as riskier, which is why they sell at lower multiples than middle-market businesses.

The middle market is made up of manufacturing firms, distribution companies, wholesalers, and large service-based companies. The middle market is further divided into the lower, middle, and upper-middle markets. Buyers perceive middle-market businesses as less risky than small businesses, and these businesses sell at higher multiples than Main Street businesses.

Understanding the difference will also help you decide what you should focus on first to maximize the value of your business.

We also answer the following questions in this article:

• What are the major differences between small and mid-sized businesses?
• Are there different types of buyers for small and medium businesses?
• Do different types of buyers have different goals depending on the size of the business?
• Is the process different for selling a Main Street vs. a middle-market business?
• How do most brokers differentiate between small and medium-sized businesses?
• What are the main criteria to differentiate them?
• Is your business most likely to be considered a Main Street or middle-market company?
• What can you do to ensure your business is considered a middle-market company so you can maximize the value of your business?

Regardless of the size of your business, Morgan & Westfield has you covered. To see why size matters read on.

Table of Contents

• The Primary Difference between a Small and a Middle-Market Company
• Why it’s Important to Distinguish Between Small and Mid-Sized Businesses
• How Business Brokers and M&A Advisors Differentiate Main Street and Mid-Size Businesses
• Eleven Differences Between Main Street and Middle-Market Businesses
  • Eleven Characteristics of Middle-Market Businesses
  • Eleven Characteristics of Main Street Businesses

The Primary Difference between a Small and a Middle-Market Company

The primary difference between the two marketplaces is who the ultimate buyer will be and their objectives for making the purchase or acquisition.

• If the buyer is an individual looking for income replacement, who will be actively working in the business full-time, not buying it as an investment, then the business is a Main Street business.
• If the buyer is an institution, such as a private equity group, competitor, or other business, and will employ a management team to run the business, then the business is likely to be in the middle market.

Why it’s Important to Distinguish Between Small and Mid-Sized Businesses

The distinction matters when selling your business, because the process used to sell each size and type of business is different. Determining if your company is a small or mid-sized company influences how to sell your business and who the likely buyers will be. The main difference between the process of selling a Main Street business and a mid-sized business lies in how they are marketed.

• Small businesses are marketed on business-for-sale websites, with a set price, to a broad audience of buyers. Additionally, the business may require no specialized skills to operate, so a larger audience of buyers may be qualified to operate the business.
• For mid-market businesses, it’s often necessary to employ a targeted approach, which involves creating a list of potential acquirers and contacting them directly. There are business-for-sale portals targeted at the middle market, however, most M&A advisors do not exclusively rely on these portals.

Marketing to sell small businesses and mid-size businesses includes other differences that we tailor to every client, such as customizing the CIM, the creation of a Teaser Profile, and nuances in deal structure.

How Business Brokers and M&A Advisors Differentiate Main Street and Mid-Size Businesses

Why do they use revenue, cash flow, EBITDA, or other financial measures, instead of describing who the buyer will be?

Brokers and advisors must describe the types of transactions they prefer to work on using criteria that are easily grasped by potential clientele. They feel that objective, quantifiable criteria, such as revenue, cash flow, or other financial measures are easier to communicate, as opposed to subjective criteria, such as who the buyer of their business will be.

When determining whether a business is a “small” or a “midsize” business, net income or other measures of cash flow (EBITDA, SDE, etc.) are rarely used as guidelines because they are not as objective as revenue (income needs to be converted to EBITDA and most business owners don’t know what their EBITDA is). However, these are normally the most accurate predictors of whether the business is a ‘Main Street’ or a middle-market business.

EBITDA and SDE are rarely used by brokers to screen potential clients because SDE or adjusted EBITDA are not objective and are time-consuming for most entrepreneurs to calculate. Most entrepreneurs know their most recent net income but likely don’t know how to properly calculate SDE or adjusted EBITDA. They may not know what adjustments are appropriate when calculating their adjusted EBITDA.

Some intermediaries attempt to categorize ‘Main Street’ and middle-market businesses by revenue or asking price, to simplify the equation. While there is no perfect solution, this is perhaps the simplest. They use this as a general screening mechanism, then further refine their selection criteria based on a deeper dive with the entrepreneur.

For example, a gas station or wholesale business generating $5 million in annual revenue is certainly different from a law firm generating the same amount of revenue. Most intermediaries state on their website something to the effect of: “we specialize in selling businesses with $5 million to $100 million in annual revenue.” While most entrepreneurs know the revenue from their business, they may not know their EBITDA offhand.

Evaluating how to appropriately categorize a business for sale — determining whether it’s a small business or a mid-size business — is an ongoing balancing act for brokers, because objective financial parameters cannot be set that will neatly categorize all businesses as Main Street or middle market. This makes initially screening potential clients an inexact science for most brokers, M&A advisors, and investment bankers.

Eleven Differences between Main Street and Middle-Market Businesses

Eleven Characteristics of Middle-Market Businesses:

• Industry : Service, manufacturing, distribution, wholesale, technology. Few businesses in the middle market are in retail.
• Cash Flow/EBITDA/SDE: Most institutional buyers require a minimum cash flow of $1 million to $5 million per year.
• Revenue: Revenue is dependent on the industry and the gross profit margins. Revenue is often used as a tool by the acquirer to prescreen a target to determine if they are interested. If net margins in the industry are 10% and the buyer requires $1 million in EBITDA, then the buyer will target businesses with at least $10 million in annual revenue. If net margins are 30% and the buyer requires $5 million in EBITDA, then the buyer will target businesses with at least $15 million in annual revenue.
• History: Businesses in the middle market tend to have been established for longer periods of time.
• Staff: Middle-market businesses tend to have a strong management team or may have layers of management, and their workforce may be unionized.
• Competitive Advantage: Businesses in the middle market tend to have some sort of competitive advantage or proprietary technology, which is often why they are acquired. They are also more likely to have intellectual property, such as patents, trade secrets, or trademarks.
• Documentation: Middle-market businesses have more thorough internal documentation and their financial statements are often audited or reviewed.
• Ownership: Owners of middle-market businesses are often more sophisticated, knowledgeable, and experienced and employ a wider variety of professional advisors. Ownership may also be dispersed amongst several individuals and different classes of equity may exist. Mid-sized companies are more difficult to manage, requiring a broader range of management skills and experience. Most owners of mid-sized businesses have learned to obtain results through others and spend more time working on the business as opposed to in the business.
• Financing: Owners of middle-market businesses often have more access to capital at lower interest rates.
• Metrics: EBITDA is the most common metric used to value a business in the middle market.
• Buyers: Buyers of middle-market companies tend to be other companies, such as direct or indirect competitors, or investment firms, such as private equity groups.

Eleven Characteristics of Main Street Businesses:

• Industry: Most operate in the retail and service sectors.
• Cash Flow/EBITDA/SDE: Main Street businesses generate less than $1 million in annual cash flow.
• Revenue: They also generate less than $5 million to $10 million per year in annual revenue.
• History: In addition to being smaller, Main Street companies may also be newer, however, this is not always the case.
• Staff: Main Street businesses tend to have either a small management team or none at all. The owner often plays an instrumental role in the business and the business is heavily dependent on the owner. The labor force is rarely unionized.
• Competitive Advantage: Typically, there is no strong competitive advantage or proprietary technology.
• Documentation: With a Main Street business, there is often little internal documentation. Most knowledge of the business is in the owner’s head and the financials are often compiled, and not reviewed or audited.
• Ownership: Owners of Main Street businesses are often less sophisticated, and the business is usually locally owned.
• Financing: The owners of Main Street businesses have often financed the businesses themselves using personally guaranteed loans, credit cards, or loans from friends.
• Metrics: SDE is the most common metric used to value a business in the Main Street market.
• Buyers: Buyers of small businesses tend to be former business owners or corporate executives who are buying a job.

It is important to understand that these are only rough guidelines or benchmarks for determining a small business versus a mid-sized business. Some middle-market businesses may generate no revenue while some Main Street businesses may generate $10 million to $20 million per year in revenue.

Many brokers, such as ourselves, work both in the Main Street and the lower middle market. Why? Many businesses with annual revenues from $1 million to $20 million can be sold using either approach and oftentimes the buyer may be an individual or an institution. Regardless of the size of your business, it’s important to understand the differences between a Main Street business and a mid-sized business in order to effectively target your marketing efforts and successfully sell your business.