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

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

When it comes to selling your company, understanding this distinction is crucial.

The level at which your business operates, whether it’s a small or mid-sized venture, holds the key to determining its value and the most effective selling process. These two marketplaces differ significantly in terms of the ultimate buyer and their objectives for the acquisition.

On Main Street, you’ll find a diverse range of businesses, from charming “mom and pop” establishments like restaurants, coffee shops, and landscaping companies to efficient auto and truck service centers, convenience stores, franchises, and various small service-based businesses. However, Main Street businesses are often perceived as slightly riskier, resulting in lower selling multiples compared to middle-market businesses.

The middle market, on the other hand, encompasses manufacturing firms, distribution companies, wholesalers, and large service-based enterprises. Within the middle market, there are lower, middle, and upper-middle segments. Buyers tend to view middle-market businesses as less risky than their smaller counterparts, leading to higher selling multiples.

Understanding these differences will empower you to focus on the right strategies to maximize the value of your business.

In this article, we provide insightful answers to important questions:

• 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 distinct goals depending on the business’s size?
• Is the selling process different for Main Street versus middle-market businesses?
• How do most brokers differentiate between small and medium-sized businesses?
• What are the primary criteria used to distinguish them?
• Is your business likely to be considered a Main Street or middle-market company?
• What can you do to ensure your business is confidently perceived as a middle-market company, allowing you to maximize its value?

No matter the size of your business, rest assured that CasinosBroker has got you covered. To understand why size matters, read on.

The main distinction between a Small and a Middle-Market Company

The fundamental distinction between these two marketplaces lies in the ultimate buyer’s profile and their objectives for the purchase or acquisition.

In the case where the buyer is an individual seeking income replacement and actively intends to work full-time in the business rather than viewing it as a mere investment, the business would fall under the category of Main Street businesses.

On the other hand, if the potential buyer is an institution, such as a private equity group, competitor, or another business entity, and their plan involves employing a dedicated management team to run the business, then it is likely to be categorized as a middle-market business.

The significance of differentiating between Small and Mid-Sized Businesses

Understanding the difference between small and mid-sized businesses is crucial when selling your company, as it dictates the approach and potential buyers. The selling process varies significantly for each size and type of business, particularly in how they are marketed.

Small businesses are typically marketed on business-for-sale websites with a fixed price, targeting a broad audience of potential buyers. These businesses may require no specialized skills to operate, making them accessible to a larger pool of qualified buyers.

In contrast, mid-market businesses often require a more targeted approach. This involves creating a list of potential acquirers and directly reaching out to them. While there are business-for-sale portals specific to the middle market, most M&A advisors don’t solely rely on them.

The marketing strategies for selling small and mid-size businesses are tailored to each client’s unique needs, including customizing the Confidential Information Memorandum (CIM), creating a Teaser Profile, and addressing nuanced deal structures.

Distinguishing Main Street and Mid-Size Businesses: Insights for Business Brokers and M&A Advisors

The use of revenue, cash flow, EBITDA, or other financial measures, rather than describing the buyer, is because brokers and advisors want to communicate easily understandable criteria to potential clients. They prefer objective, quantifiable factors that can be easily conveyed, as opposed to subjective criteria like identifying the specific buyer for their business.

When determining if a business is classified as “small” or “midsize,” brokers and advisors rarely use net income or other cash flow measures (EBITDA, SDE, etc.) as guidelines. This is because they are not as objective as revenue, which is a more accurate predictor of whether the business falls under the ‘Main Street’ or middle-market category.

Using EBITDA and SDE to screen potential clients is uncommon among brokers due to their lack of objectivity and the time-consuming calculations involved. Most entrepreneurs are familiar with their net income but may not know how to calculate SDE or adjusted EBITDA accurately.

To simplify the categorization, some intermediaries rely on revenue or asking price as a general screening mechanism. However, there is no perfect solution, and further refining the selection criteria requires a deeper discussion with the entrepreneur.

For instance, a gas station or wholesale business generating $5 million in annual revenue is distinct from a law firm generating the same revenue. Brokers often specialize in selling businesses within a certain revenue range, such as “$5 million to $100 million in annual revenue,” as most entrepreneurs are aware of their business’s revenue but may not know their EBITDA offhand.

Categorizing a business appropriately for sale, whether it is small or mid-size, presents an ongoing challenge for brokers, as not all businesses fit neatly into objective financial parameters for Main Street or middle-market classification. As a result, initially screening potential clients remains an inexact science for most brokers, M&A advisors, and investment bankers.

Eleven Distinctions between Main Street and Middle-Market Businesses

Eleven Key Characteristics of Middle-Market Businesses:

1. Industry Diversity: Middle-market businesses thrive in various industries, including service, manufacturing, distribution, wholesale, and technology. Retail businesses are relatively rare in this segment.
2. Robust Cash Flow: Institutional buyers typically seek businesses with a minimum cash flow of $1 million to $5 million per year.
3. Revenue Flexibility: Revenue varies based on industry and gross profit margins. Acquirers often use revenue as a tool to prescreen potential targets. For example, if net margins are 10% and the buyer requires $1 million in EBITDA, they focus on businesses with at least $10 million in annual revenue. If net margins are 30% and the buyer needs $5 million in EBITDA, they target businesses with at least $15 million in annual revenue.
4. Established History: Middle-market businesses have a track record of longevity, having been established for considerable periods.
5. Strong Management: Middle-market businesses boast a robust management team or may have well-defined layers of management, and they may have a unionized workforce.
6. Competitive Edge: These businesses often possess a competitive advantage or proprietary technology, making them attractive targets for acquisition. Additionally, they are more likely to hold valuable intellectual property, such as patents, trade secrets, or trademarks.
7. Comprehensive Documentation: Middle-market businesses maintain thorough internal documentation, and their financial statements are frequently subjected to audits or reviews.
8. Seasoned Ownership: Owners of middle-market businesses are typically highly sophisticated, knowledgeable, and experienced. They employ a diverse array of professional advisors, and ownership may be dispersed among multiple individuals with different classes of equity. Managing mid-sized companies requires a broader range of management skills and experience. Most owners have honed the ability to achieve results through others and spend more time working on the business rather than in it.
9. Accessible Financing: Owners of middle-market businesses often enjoy better access to capital at lower interest rates.
10. EBITDA as a Valuation Metric: EBITDA is the most common metric used for valuing middle-market businesses.
11. Attractive Buyers: Middle-market companies attract interest from other companies, including direct or indirect competitors, and investment firms like private equity groups.

These key characteristics distinguish middle-market businesses, making them sought-after prospects for both institutional buyers and investors.

Eleven Characteristics of Main Street Businesses:

1. Industry Focus: Main Street businesses primarily operate in the retail and service sectors.
2. Cash Flow/EBITDA/SDE: These businesses generate annual cash flow below $1 million.
3. Revenue Range: Main Street businesses typically generate annual revenue between $5 million to $10 million.
4. History: While often smaller, Main Street companies may vary in age, with some being newer ventures.
5. Staff Structure: Main Street businesses usually have a small management team or rely heavily on the owner. The labor force is rarely unionized.
6. Competitive Advantage: Main Street businesses generally lack strong competitive advantages or proprietary technology.
7. Documentation: Internal documentation is limited in Main Street businesses, with most knowledge residing in the owner’s hands. Financials are often compiled rather than reviewed or audited.
8. Ownership Profile: Owners of Main Street businesses are often less sophisticated, and these businesses are typically locally owned.
9. Financing Approach: Owners often finance Main Street businesses themselves, using personally guaranteed loans, credit cards, or loans from friends.
10. Valuation Metric: SDE is the most common metric used to value Main Street businesses.
11. Buyer Profile: Buyers of small businesses are often former business owners or corporate executives seeking a new opportunity.

It is essential to note that these are general guidelines for distinguishing between small and mid-sized businesses. Some middle-market businesses may generate no revenue, while certain Main Street businesses may boast revenues between $10 million to $20 million annually.

At our brokerage, we have expertise in both the Main Street and lower middle market, as we recognize that businesses with annual revenues ranging from $1 million to $20 million can be sold using either approach. Whether the buyer is an individual or an institution, understanding the differences between Main Street and mid-sized businesses is crucial for targeting your marketing efforts effectively and successfully selling your business.