How Middle Market M&A is Driving the Economy

Defining the Middle Market

The mid-market sector includes owned businesses with earnings between $10 million and $1 billion. Even though 3% of all businesses in the US fall into this category, they contribute significantly to the nation's private sector GDP and the job market.

Compared to the publically traded corporations, the majority of mid-sized and small businesses are privately held and operate without the scrutiny of public investors and analysts. A large number of these companies are fueled by spirit and family control focusing on expanding their businesses and nurturing development.

The mid sized category comprises companies generating over $10 million in revenue and corporations with revenues surpassing $1 billion. These mid-sized enterprises have operations that are not as extensive as those of the country's largest firms.

The sized market fuels local economies through job creation and economic contributions to communities nationwide by spanning sectors like healthcare, finance, manufacturing, retail, other services and technology.

Middle Market Company Characteristics

Middle-market companies stand out for their characteristics that set them apart from both corporations and small businesses. These firms are recognized for their operations, efficient decision-making procedures, and potential, for growth.

  • Lean and Agile Operations: Mid-sized businesses function with a streamlined approach compared to big corporations. They have the flexibility to adjust swiftly to market fluctuations and meet customer demands. Their efficient setup enables them to keep expenses down while efficiently creating and introducing products.
  • Nimble Decision Making: Middle market companies are being less burdened by layers of management compared to corporations and have the ability to make independent decisions. Instead of having to wait for approval from departments, founders and executives, they can promptly greenlight product launches and partnerships. This agile strategy provides middle market firms with an advantage.
  • High Growth Potential: Many middle-market companies are still in their growth phase. Though the accomplishments of the past are noteworthy, the potential for growth is more promising. By securing funding and implementing strategies, mid sized businesses can expand their customer reach, market presence and financial gains at a swift pace. Their growth potential makes them highly attractive to investors.

The combination of lean operations, quick decision-making, and high growth enables middle-market companies to compete successfully against industry giants. Their structural advantages allow them to respond to customers and outmaneuver big corporations. This unique mix of characteristics drives middle-market firms' future value and performance.

Importance of Middle Markets

The middle market plays a role in the economy and job market. Businesses within this sector are usually characterized by revenues ranging from $10 million to $1 billion and make up 3% of all U.S. companies. Yet, they contribute significantly to private sector GDP and employment opportunities, accounting for one-third of both. Their impact on innovation and economic expansion is substantial.

The lower middle market also plays a role in sectors like manufacturing, healthcare, technology, and retail. With around 200,000 businesses in the U.S., these companies have shown growth over the past ten years. The wide range of industries within sized companies helps enhance economic stability and diversity across the middle and lower markets.

Unlike corporations with their structures, business leaders even in mid-sized businesses can quickly adapt and adjust their strategies to meet evolving market demands and customer preferences. Surprisingly, many companies today started as mid-sized enterprises before expanding exponentially. Middle market companies are focused on the cutting edge and often develop the products, services, and processes that influence entire industries.

In summary, the middle market punches far above its weight when driving GDP, creating jobs, and fueling innovation. That is why policymakers, investors, and financial institutions pay close attention to the health and vitality of this critical sector. With the proper access to capital and talent, middle-market companies can turbocharge economic expansion for decades.

Challenges Facing Middle Market Companies

While vitally important, the middle market faces some key challenges and other factors that can hinder its growth and success. Some of the main difficulties include:

  • Accessing Growth Capital: One of the biggest hurdles for middle market firms is getting the funding and capital required to scale up their operations. They often do not have the size or scale to readily access public markets. At the same time, they may be too large for traditional bank lending. This leaves many middle-market companies strapped for the capital they need to grow.
  • Attracting Top Talent: With limited resources compared to large corporations, middle-market companies can struggle to recruit and retain the best talent. Stock options and lucrative compensation packages that are extremely common at big companies may not be feasible for middle-market firms. This talent shortage can stunt their growth potential.
  • Competing with Large Corporations: Middle market firms across sectors face competing against significantly larger rivals. Keeping pace in technology, marketing, distribution, research, and development can pose a challenge. Middle-market companies' resources and scale are often overshadowed compared to their counterparts.

Middle Market M&A Trends

Over the years there has been an increase in the volume and scale of mergers and acquisitions in the mid-market sector. This specific category which includes transactions ranging from $100 million to $500 million is experiencing a rise in both the quantity and worth of deals as more buyers show interest in these companies.

Several key trends are fueling the steady rise in middle market M&A activity:

  • Deal Volume Increasing: There has been a rise of 10% in finalized transactions between 2020 and 2021 indicating a growing interest from buyers. Businesses are actively participating in mergers and acquisitions to stimulate expansion with transaction levels approaching those observed prior to the pandemic.
  • Larger Deals: Not only is deal volume up, but the average deal size is also rising in the middle market. Easy financing conditions allow players to pursue larger acquisitions. The average middle market deal value increased 15% year-over-year in 2021.
  • Key Industries: Technology, healthcare, and business services stand out as sectors for middle-market transactions. Buyers perceive value and growth opportunities in these fields. Notably, the technology sector alone represented a quarter of all middle market deals in the year.
  • Strategic Players vs. Financial Investors: Both are known businesses looking to expand through acquisitions and private equity investors are attracted to the market. Strategic companies aim to improve their operations while financial investors concentrate on boosting performance and maximizing returns. Private equity firms took the lead representing than half of all middle market acquisitions in 2021.

The combination of high company valuations, limited partners and eager buyers continues to make the middle market a sweet spot for mergers and acquisitions. This robust activity will likely persist as businesses in various industries seek new opportunities for expansion and revenue growth via M&A.

Benefits of Middle Market M&A

The increase in middle market M&A activity is fueled by the advantages it brings to both buyers and sellers of sized companies.

Engaging in mergers and acquisitions within the market allows buyers to gain access to new markets, technologies, skilled employees, and products that can enhance their competitive edge. Acquiring an established middle-market firm enables a buyer to enter a new geographic area or sector. Additionally, it grants them access to technologies and advancements that would otherwise require time and effort to create in-house. Buyers can also rapidly onboard new talent and skillsets through a middle-market acquisition.

Engaging in middle-market transactions also allows purchasers to expand their range of products and services. Acquiring goods or services is a strategy when creating them from scratch would be too expensive or time-consuming. Broadening the scope of offerings increases interactions with customers and enhances the competitiveness of a buyer's solutions.

As many middle-market businesses are privately held or family-owned, these transactions offer an exclusive liquidity opportunity. M&A allows these owners to exit and realize a return on the market share of their investment. Rather than going public, a sale to a strategic buyer or financial sponsor gives owners of a middle market firm cash at close.

The sale transactions of the middle-market companies provide access to the resources and capital they need to scale up. A middle market firm gains the financial backing and operational infrastructure to expand nationally or globally through acquisition by a larger buyer. They benefit from the buyer's financial strength, distribution networks, manufacturing capabilities, and other resources. With these resources, a middle market company can accelerate growth in a way that may not have been possible as an independent firm.

Challenges of Middle Market M&A

Among the obstacles encountered in middle market transactions are:

Valuation Disconnects

One significant hurdle in the deal process for middle market mergers and acquisitions involves reaching a consensus on the valuation of the business between the purchaser and seller. Sellers frequently overestimate the value of their company, whereas buyers aim to lower the valuation through discussions and transaction procedures. This disparity in valuation can hinder transactions. Result in prolonged negotiations. Closing this divide necessitates communication, validated valuation techniques, and a readiness to make concessions from both parties.

Integration Challenges Post-Close

It's crucial to merge the purchased company with the buyer's business to achieve synergies save costs and see a return on investment from the agreement. However, smaller middle market firms often lack robust infrastructure and systems. Integrating these companies seamlessly into large organizations with very different cultures can prove challenging. Proper integration planning and allocation of resources are vital for ensuring a smooth transition.

Regulatory Hurdles

The growing attention to regulations in industries like healthcare and finance adds complexity to understanding and complying with them. Prospective buyers should carefully examine the adherence of the company they're interested in acquiring to steer clear of penalties or punitive measures after the deal is finalized. Tasks such as securing ownership transfer permits, adhering to data protection laws, regulatory compliance and obtaining product endorsements require attention. Working closely with legal advisors can help buyers anticipate and clear potential regulatory roadblocks.

Steps in the Middle Market M&A Process

Completing a successful middle market M&A deal involves multiple steps that require careful preparation and execution. Here is an overview of the key phases:


Before bringing a middle market company to market, owners should spend 6-12 months readying the full business model. This includes steps like:

  • Cleaning up the financial statements and books
  • Securing customer contracts
  • Filing all regulatory paperwork
  • Identifying growth opportunities
  • Creating a sustainable cost structure
  • Building a stable management team
  • Drafting an information memorandum

Proper preparation increases the cost savings and attractiveness of the target company to potential buyers.

Finding the Right Buyer Fit

Once ready for a sale, middle market companies need to identify the right category of buyer that aligns with their goals. Strategic corporate buyers, private equity firms, or a management buy-out are all options.

Owners should consider deal timing, valuation needs, future expectations, company direction, and their desired role post-merger. 

Due Diligence Process

Before completing a deal, buyers will conduct an in-depth review known as due diligence. This involves examining:

  • Financial statements and performance
  • Tax filings and legal documents
  • Intellectual property
  • Customer contracts
  • HR policies and compensation
  • Property leases and assets

A smooth due diligence process builds buyer confidence to close the deal. Sellers should ensure all information is organized ahead of time.

Deal Negotiation and Closing Deals

During negotiation, buyers and sellers will discuss deal terms like price, deal structure, timing, management roles, interest rates, financing, and other details. Most middle market deals close within the same period of 3-6 months once terms are agreed.

Both sides are driven to get the best deal possible that is in their best interests. Experienced M&A advisors facilitate the deal's progress.

Post-Merger Integration

After the deal closes, combining the two companies presents operational, technical, and cultural challenges. Proper post-merger integration is key to realizing the deal rationale and objectives.

The buyer typically leads the integration process. Structured planning and clear communication enable a smooth transition.

Role of Advisors in Middle Market M&A

Key advisors that are involved in these transactions include:

Investment Banks

Investment banks act as the quarterback in a middle market M&A process. Their key responsibilities include:

  • Getting the selling company ready for sale: Putting all the necessary due diligence materials, crafting presentations for potential investors, organizing financial records, and ensuring everything is in order.
  • Managing the sales process: Creating a list of buyers promoting the company to attract interest, overseeing bidding processes, arranging visits and meetings with management teams, and handling negotiations for the transaction.
  • Finding strategic and financial buyers: Using their industry knowledge and connections to pinpoint buyers who are expected to offer the valuation.

Wealth Managers

Wealth managers consult with the owners of middle market companies to develop customized wealth planning strategies and prepare for a liquidity event like a sale. Their key role is to help business owners:

  • Maximize and protect value during a transaction
  • Minimize taxes from the sale proceeds
  • Develop a tailored investment strategy for the influx of funds
  • Plan for the transition away from the business


Experienced M&A lawyers help guide a transaction from letter of intent to close. Key activities include:

  • Conducting due diligence on the target company
  • Drafting and negotiating the purchase agreement
  • Advising clients on deal structure, terms, and risks
  • Incorporating relevant representations, warranties, and indemnities
  • Ensuring compliance with regulations

Relying on a team of experienced advisors is critical to explore all options and maximize value when selling a middle-market company. Their expertise in navigating complex finance deals and deal values often leads to successful outcomes.

Future of Middle Market M&A

The outlook for middle market M&A activity remains positive going forward, with deal activity expected to remain robust over the next few years. However, rising interest rates and economic uncertainty could somewhat dampen the pace of deals.

The middle market deal volume will continue increasing as strategic acquirers and private equity firms remain active. The aging business owner demographic and drive demand for growth through M&A will fuel deal activity. Debt financing will likely remain accessible to support leveraged buyouts.

While mega-deals grab headlines, the bulk of M&A occurs in deals in the middle market segment. This is expected to continue as smaller, nimbler deals are often more digestible for buyers and provide higher returns.

The technology and healthcare sectors are poised to see ongoing M&A activity as digital transformation and healthcare services remain highly sought after. Niche tech companies and healthcare services provide opportunities for consolidation and scaling.

Buyers will continue seeking acquisition targets in fragmented industries with room for additional market consolidation. Roll-up strategies to aggregate smaller companies will persist.

Geopolitical tensions, trade wars, and slowing growth in key emerging markets like China pose downside risks. But the overall underpinnings for middle-market deals remain largely positive. With sound preparation and advice, buyers and sellers can capitalize on middle-market M&A opportunities.

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