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

Jacob Orosz headshot
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

Why does it matter if your business is Main Street vs. Middle-Market?

The degree to which your business is considered a small or mid-sized operation will have a profound impact on how it is valued and the most effective process for getting it sold. 

    Main Street vs. Middle Market Businesses

    Main Street = Small, “mom and pop” businesses. Restaurants, coffee shops, landscaping companies, repair shops, convenience stores, most franchises, and small agencies and service companies. Buyers perceive Main Street businesses as riskier, which is why they sell at lower multiples than middle-market businesses. 

    They are considered high-risk, sell at lower multiples, generate less than $1 million in SDE and less than $10 million in revenue, are dependent on the owner, have a limited competitive advantage and weak documentation, and are generally not sophisticated.

    Middle Market = Manufacturing firms, distribution companies, wholesalers, and large service-based companies. Buyers perceive middle-market businesses as less risky than Main Street, and these businesses sell at higher multiples than Main Street businesses. 

    They are considered lower risk, sell at higher multiples, generate at least $1 million in EBITDA or $10 million in revenue, have a strong management team and competitive advantage, have strong documentation, and are generally sophisticated.

    Who Will Buy?

    • Main Street – The buyer is an individual looking for income replacement who will be actively working in the business full-time, not as an investment.
    • Middle Market – The buyer is an institution and will employ a management team to run the business.

    How Are They Sold?

    • Main Street Businesses – Marketed on business-for-sale websites, with a set price, to a broad audience of buyers. A larger audience of buyers may be qualified to operate the business. 
    • Mid-market Businesses – Sold via a targeted approach, which involves creating a small list of potential acquirers and contacting them directly. 

    How Are They Valued?

    • Main Street Businesses – 2.0 to 3.0 times SDE
    • Mid-market Businesses – 3.0 to 8.0 times EBITDA

    Introduction

    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 it is valued and the most effective process for getting it sold. The primary difference in the marketplace is who the ultimate buyer will be and their objectives in making the purchase. 

    Understanding the difference can help you decide on which aspects to focus on first to maximize value and generate a reasonable asking price.

    The Main Street / Middle Market Divide

    On Main Street, you’ll primarily find “mom and pop” businesses such as restaurants, coffee shops, landscaping companies, repair shops, convenience stores, most franchises, and small agencies and service businesses. 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 Main Street, and these sell at higher multiples than Main Street businesses. 

    The Key Difference: Small & Middle-Market Companies

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

    • If the buyer is likely an individual looking for income replacement and will be actively working in the business full-time, not buying it as an investment, then the business is likely a Main Street business
    • If the buyer is likely 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 in the middle market.
    Understanding Buyers
    Main Street Businesses vs. Middle-Market Businesses
    CriteriaMain Street BusinessMiddle-Market Business
    Buyer TypeIndividualInstitution
    How The Buyer Will Operate the BusinessOwner-OperatorManagement Team
    Objective of BuyerIncome ReplacementInvestment

    Size Matters: The M&A Sale Process 

    The distinction matters because the process used to sell each size and type of business is different.

    Determining if your company is small or mid-sized greatly influences the most effective strategy for selling it and who the buyers will be. 

    The main difference between selling a Main Street business and a mid-sized business lies in how they are marketed. 

    • Main Street 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.
    • Mid-market businesses often need 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 don’t exclusively rely on these portals and instead contact buyers directly. 

    Marketing to sell Main Street businesses and mid-size businesses includes other differences that must be tailored to every business, such as customizing the CIM, creating a Teaser Profile, and nuances in deal structure.

    Marketing a Main Street vs. a Middle-Market Business
    Main StreetMiddle Market
    MethodsBusiness-for-Sale PortalsTargeted, Direct Approach
    PriceSet PriceNo Price
    AudienceWide AudienceNarrow Range
    RequirementsFew Specific RequirementsSpecific Experience Required

    Business Brokers & M&A Advisors 

    Why do most brokers and M&A advisors use revenue, cash flow, EBITDA, or other financial measures when differentiating between Main Street and the middle market instead of describing who the buyer will be?

    Brokers and M&A advisors must describe the types of transactions they prefer to work on using criteria that are easily grasped by potential clientele. Objective, quantifiable criteria, such as revenue, cash flow, or other financial measures, are easier for them to communicate, unlike subjective criteria, such as the type of buyer, which takes more time to explain and is subject to interpretation.

    Criteria Used to Define a ‘Main Street’ vs. a Middle-Market Business
    FinancialOthers
    RevenueIndustries
    Net IncomeBuyers
    SDENumber of Employees
    EBITDA
    Asking Price

    When determining whether a business is a “small” or “midsize”, net income or other measures of cash flow (EBITDA, SDE, etc.) are rarely used as guidelines.

    M&A brokers may use business-for-sale portals for middle-market deals, but most will focus on contacting buyers directly.

    Business brokers, M&A advisors, and investment bankers don’t screen potential clients in this way because SDE and adjusted EBITDA aren’t objective and are time-consuming for most entrepreneurs to calculate. Most owners know their most recent net income but likely don’t know how to properly calculate SDE or EBITDA or which adjustments are appropriate.

    An Alternative to EBITDA and SDE 

    Some intermediaries attempt to categorize Main Street and middle-market businesses by revenue or asking price to streamline the equation. While there’s no perfect method, 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 $10 million in annual revenue is certainly different from a law firm generating the same. Most intermediaries state on their website something to the effect that “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. 

    Revenue is, therefore, a simpler method for screening clients because every business owner knows theirs, and it isn’t subject to interpretation.

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

    11 Differences Between Main Street & Middle-Market Businesses

    11 Differences Between a Main Street & a Middle-Market Business
    Main Street BusinessMiddle-Market Business
    IndustriesMom & Pop BusinessesManufacturing, Distribution,
    Wholesale Service, Tech
    RiskHighLow to Medium
    Multiples2.0 to 3.03.0 to 8.0
    SDE / EBITDALess than $1 Million$1 Million to $10+ Million
    RevenueLess than $10 Million$10 Million to $100+ Million
    StaffDependent on OwnerStrong Management Team
    Competitive AdvantageWeakStrong
    DocumentationWeakStrong
    SophisticationLowHigh
    MetricsSDEEBITDA
    Type of BuyerIndividualsInstitutional Buyers
    Information Sources

    11 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 gross profit margins. Revenue is often used as a tool by the acquirer to prescreen a target and determine its interest. 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.

    Middle-market businesses tend to attract institutional buyers, such as a private equity group, a competitor, or other business.
    • 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’re acquired. They’re 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 usually 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. They spend more time working on the business as opposed to in the business. 

    Buyers see the middle-market as less risky and buy at higher multiples than for Main Street firms. 
    • Financing: Owners of middle-market businesses often have more access to capital at lower interest rates and, therefore, have a lower capital cost.
    • 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.

    11 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: As well as being smaller, Main Street companies may also be newer, but this isn’t 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 it’s heavily dependent on them. The labor force is rarely unionized.
    • Competitive Advantage: Typically, there’s 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 but 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’s 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.

    Conclusion

    Many brokers, including Morgan & Westfield, work both in the Main Street and the lower middle market. We do so because businesses with annual revenues from $5 million to $20 million can be sold using either approach, whether the buyer is an individual or an institution.

    From our side, the distinction is a useful starting point: we can begin to gauge the size, the competitive advantage, the likelihood of decent documentation, and the inherent risk of both types of business in order to strategize around it. 

    From your side, regardless of the size of your business, understanding the differences between Main Street and mid-sized means you can target your marketing efforts effectively and sell your business for the right price.