What’s the Difference Between “Main Street” and “Middle Market” Businesses?
Even within the business brokerage and M&A industry, there is no standard definition of a Main Street business or a Middle Market business. Ask ten brokers or advisors – or ten accountants or attorneys – and you’ll get ten different answers, most of them vague. Here are some of the definitions I’ve heard over the years.
Main Street Businesses
- Have less than $3 million in revenue.
- Have less than $5 million in revenue.
- Have a valuation of $1 million or less.
- Have adjusted earnings of $1 million or less.
Middle Market Business
- Have revenue of between $5 million and $1 billion.
- Are valued at more than $1 million.
- Have adjusted earnings of at least $1 million.
- Sell for between $1 million and $25 million.
Given these diverse points – and there are plenty more! – it’s tough to come up with a useful definition. However, at Worldwide Business Brokers, our working definition of a Main Street business is one that has a value of roughly $2 million or less. Given that, you might assume that any private business with a valuation of more than $2 million falls in the Middle Market category. Well, that may not always be the case. Let’s look at both a little more closely.
Main Street businesses are many times referred to as “mom and pops” and generally include businesses such as dry cleaners, hair salons, restaurants, auto and truck services centers, convenience stores, franchises, small manufacturing and service businesses (accounting practices, tax preparation business, etc.), internet, website development and technology businesses, small wholesalers and many other similar businesses. They are typically locally-owned and the likely buyer is generally local, as well. As a rule, because they are usually fairly small, Main Street businesses do not enjoy the benefit of the so-called “size premium” when being valued; something that might apply to larger businesses that, by virtue of their size, would appear to present a lower level of risk.
The buyer pool for Main Street business is different from that of Middle Market businesses. Generally, the buyer will be local and will operate the business. Or, the buyer could be a somewhat larger company that wants to expand via acquisition. The buyer is unlikely to be a private equity group (PEG).
The transaction itself is generally not very complex and the parties involved are usually less experienced and financially sophisticated. Documentation needed for the sale of a Main Street business is less elaborate and detailed than that needed for a Middle Market business and the transaction will be relatively simple.
Finally, because the buyer pool for a Main Street business is broad – meaning that it generally does not require specific specialized talents, education or experience – marketing a Main Street business involves the “shotgun” rather than “rifle” approach. The more people that are exposed to the opportunity, the better.
The term “Middle Market Business” covers a lot of ground; so much, in fact, that it is generally sliced and diced into three or four sections: Lower Middle Market, Middle Market and Upper Middle Market are examples. The lower middle market is defined variously as businesses having up to $50 million or $75 million in revenue.
Typical businesses in this market would include small to medium size specialty manufacturers, multi-location franchise development companies, real estate firms, logistics and distribution companies, geographically diverse service businesses, etc. The buyers of middle market business are not necessarily – and, in fact, are unlikely to be – local.
Middle market businesses often are perceived by buyers as having less risk than Main Street businesses and, as such, might be valued with the benefit of a “size premium” that would give a higher value to each $100,000 of adjusted earnings than might be given to the same $100,000 earned by a Main Street business.
The buyers of Middle Market businesses are likely to be similarly-sized or somewhat larger companies that want to expand via acquisition, private equity groups or several individuals that have banded together to escape the corporate grind and want to apply their skills and connections to operating a business on their own.
The sale of Middle Market businesses will require different and more detailed and complex documentation. Financing is likely to involve multiple sources and intricate structuring.
Brokers working the Middle Market are often referred to as M&A (“mergers and acquisition”) specialists and, along with the client’s attorneys and accountants, often act as advisors to their clients on how to structure, finance and close the transaction.
What’s The Point of this Debate??
Well, there really isn’t any. As a business broker you can choose the market you want to play in.
There are more opportunities to sell Main Street businesses but the payday is significantly greater for Middle Market Businesses. Selling Main Street businesses takes less time but you have to sell several of them each year to make the kind of commission one large transaction will generate. The buyers and sellers of Main Street businesses are generally less sophisticated than those of Middle Market business and financing is more straightforward for the smaller firms. As a rule, this should make for an easier and quicker sale.
Documentation for a Main Street type transaction is relatively simple: accountant- or seller-prepared tax returns and Quickbooks-type profit and loss statements are generally sufficient. For Middle Market businesses, CPA-reviewed or audited statements are usually necessary.
Financing for Main Street business transactions is generally different and less complex than for Middle Market transactions. In the former, one or two sources, including the seller, usually will be sufficient. For Middle Market deals, earn-outs, standby agreements and other special terms can add layers of complexity to the deal and, as a rule, more experienced advisors are needed.
When marketing a small business, you want to get it in front of as many potential buyers as possible; the shotgun approach. With Middle Market businesses, you choose your targets by identifying likely or appropriate buyers and establish a dialog with them individually; the rifle approach.
At Worldwide Business Brokers, we like to work in both the Main Street and lower Middle Market space; businesses with revenue of, say, $500,000 up to $25 million or $30 million. Some of our brokers specialize in lower end while others prefer to work on larger deals.
I suggest that, if you are beginning your career as a professional business broker – or if you are in the early stages of that career – get experienced in the Main Street market. It is easier to get a handle on and, after a couple of years and a few deals in your pocket, you’ll be more confident and better able to take on larger transactions. If you need help along the way, let me know.
If you have questions or comments, put them in the Comments box, below. I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you next week.