The winners and losers.
There are only a few of them whose names we see regularly in the business and financial media, though there are 182,578 of them in the US, and according to the Middle Market Power Index by Dun & Bradstreet and American Express, they’re the most vibrant and fastest growing segment of American business: middle market enterprises.
There has been considerable discussion about the German “Mittelstand,” the often closely-held middle-market companies, and how the German system supports them and helps them thrive, and how they’re the backbone of Germany’s vaunted industrial sector that drives its export-dependent economy. But little gets said about middle market companies in the US, and yet they are where the action is.
They’re defined as generating between $10 million and $1 billion in revenue. As of Q1, the average middle market firm in the US employed 288 workers and generated $50.8 million in revenues.
Together, they account for only 0.96% of all companies in Dun & Bradstreet’s commercial database of over 19 million active US businesses. But they generate $9.3 trillion in revenues in their increasingly global operations, and they employ 27% of all workers in the private sector.
Of the 19 million businesses in the database, 18.9 million, or 99%, are small enterprises with less than $10 million in annual revenues. On average, they have five employees and generate $295,270 in revenues.
And just 3,025, or 0.02% of all active US businesses, are large companies with $1 billion or more in revenues. The average large company employs 18,110 workers and generates $6.8 billion in revenues.
Small businesses have been decimated since 2011. The number of all commercially active companies has dropped by 17%, all of it on the backs of small businesses whose number dropped 18%. It has been tough out there for small businesses. Many of them didn’t make it. Others weren’t generating enough moolah. So the owners decided it wasn’t worth the trouble and shut them down or just stopped doing business and went on to do other things.
But other small companies became successful and grew their revenues past the $10-million mark and thus moved up into the category of middle market firms. And there were a lot of them: Since 2011, the number of middle market firms soared by 87%, even as the number of small companies had plunged 18%!
And some of them were so successful that their revenues exceeded the $1 billion mark. Thus they moved up into the category of large companies. With this influx, the number of large companies jumped 57% since 2011!
They’re playing “a foundational role in the economic vitality of the country,” the report explained. In other words, they’re a vibrant bunch, in a relentlessly tough economy.
They accounted for 52.9% of private-sector net job creation since 2011! By comparison, large firms created 35.7% of the net new jobs during that period. And small companies created only 11.4% of the jobs, though they make up 99% of all commercially active companies.
The report summarizes it this way:
Thus, when assessing economic trends over the past five years, middle market firms are performing more strongly – in firm formation, employment, and revenue growth – than firms in any other business size class.
They’re particularly strong in the manufacturing sector: 18% of them are manufacturers, as compared to 3% of all companies. Nearly 60% of middle market companies are clustered in these five sectors:
- 18% in manufacturing (vs. 3% of all firms)
- 17% in wholesale trade (vs. 4% of all firms)
- 6% in educational services, such as private schools (vs. 1% of all firms)
- 12% in retail trade (vs. 11% of all firms)
- 6% in health services (vs. 6% of all firms)
Most if these companies have been around for a long time. Only 11% of middle market firms have been in business for 10 years or less, compared to 61% of all US firms! Which shows just how hard it is and how long it takes for a small company to make it to the next level.
Of all middle market companies…
- 11% have been in business for 10 years or less (vs 61% for all firms)
- 35% have been in business for 10-29 years (vs 28% of all firms)
- 26% have been in business for 30-49 years (vs 8% of all firms)
- 28% have been in business for 50+ years (vs 3% of all firms).
“All told, the mean number of years in business for middle market firms is 40 – more than three times the overall average of 13 years,” the report said.
Despite the successes, it’s tough out there for the average middle market company. They’re besieged from all sides, and growth is a slow, hard slog: In the five-plus years since 2011, the average middle market firm increased the number of its employees by 8.7% and its global revenues by just 6.9%, which is nothing more than the rate of consumer price inflation over the period. And that slow-growth average middle market firm defines the most successful segment of US enterprise! A fitting description of the troubled real economy in the US and globally.
So is the job market for professionals now unraveling? Read… LinkedIn Job Postings Plunge, “by far the Worst Month since January 2009”
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Really quite a dismal report.
Considering that 99% of companies are small with 3 to 5 employees.
This sector is the real backbone of the economy, responsible for the majority of jobs. The middle tier number of companies may be growing, but without growth at the grass roots level, the economy remains stagnant and indeed is now shrinking.
Also worth consideration is the amount of mergers and acquisitions that have taken place, that may account for some of the growth of the middle tier, at the expense of small companies whose numbers have fallen.
Recent reports of poor tax withholdings, income tax revenue, along with poor sales tax receipts, to say nothing of continuing very poor employment numbers, portend an economy that is not in recovery.
Rearranging the deck chairs on the sinking Titanic may have been asthetically pleasing, but in no way was a positive.
Some of my pension money is in a fund targeting small-cap equities. My thinking was that these companies would be big enough to show that they’d figured out how to do something right, and small enough that control-fraud wouldn’t be an irresistible temptation. In line with this report, it seems to have kept up with events. It isn’t making me filthy rich, but that was the point about the control-fraud, wasn’t it?
“German “Mittelstand,” the often closely-held middle-market companies”
I presume the same (“closely held”) is true for the US companies too. So is there success attributal to their medium size and independence from the wall street crowd or good old cronyism?
Jees! They are less than 1 percent of the companies and employ 27 percent of the private sector work force?
The take away- don’t bail out any more big banks or auto companies if it means short changing this sector.
These numbers suggest a government funded ( or subsidized) privately administered bank to invest or lend ONLY to this sector.
To use a gold mining analogy- it looks like high grade ground.
One way to do this is for the bank to finance by taking equity share in the firms, instead of debt financing. This way the firm isn’t hampered by capital bleed for debt servicing. The firm and bank can negotiate on dividend payments when the firm is doing well enough, and the firm can buy the equity share back if it’s doing well. This pattern was adopted by German and other central European countries a long time ago, and it was a successful system. The banks would probably insist on some seniority system for the equity. I don’t know if they still do this. (Of course it won’t work if the business model isn’t sound.)
The Anglo-American sphere is centered on debt financing, with the obvious problem of continually draining the companies of capital.
Vibrant isn’t the word I would use. When you create a grand canyon sized leap in legal requirements for people moving from employee to small business owner it reduces new businesses starts and reduces competition for medium sized businesses allowing them to grow.
As regulatory costs rise, economies of scale- math- mean less small businesses, irrespective of arbitrary definitions of size.
As easy money/credit is funneled to the select few, small business is starved of capital. And there is a chasm of difference between a business of $10 million in sales vs. $1 billion (some range- times 100)
And what is the common thread ? Paid-for politicians rewarding their cronies.
Spengler at Asia Times pointed out that, outside of the top 500 companies, profit margins are very low. Tech companies outside the top 50 had an annual ROI of minus 15%. Many of these smaller companies are valued like the next Google, but statistically only 1 or 2 will become that profitable. Small companies can grow big, but they also mostly stay small or fail, especially in a stagnant economy.
From the viewpoint of employment- so what? Note that the piece i.e, the topic is medium-small size companies. If the owner is happy with his end, and pays wages great. BTW: very view of these middle size companies will be ‘tech’ the apparent new name for any social media that uses tech-a computer network.
HVAC, to name just one area will greatly outnumber all of them.
PS: I recently had my gas hot water tank changed. Because I’ve done a few electrics and the installer was friendly we chatted while he worked And I timed him. After deducting the cost of the tank, picking up the tank and a bit for supplies, he was running pretty much neck and neck with my dentist- at least 200 an hour. (But he was an ace)
Not glamorous and not scale-able ; but more likely to survive than most ‘tech’ startups.
You could have paid him by the hour as well. When a tradesman bids per job, it takes into account unforseen problems. I know, I am a tradesman. My son is one as well. Some times you make great money per job and other times you lose your shirt. However, when you have a good rep people are happy to pay by the hour as they know you work hard and will get the job done as fast as possible.
Usually, when a job goes as well as you describe we lower the price for the customer. It is the best advertising money can buy. $200/hr is criminal in my books.
You should have gone tankless, it would have saved you a bundle in energy costs and space.
nick
I’ve been busy with my “small” business- just read your hot water piece.
1. Your dentist already has his next “job” sitting in a chair when he finishes with you. He seamlessly starts each job.
2. Your installer has to drive (dead time, no revenue) to his next job.
So he is not making $200 per hour.
Rolf,
I have waited for comments from others before chiming in. The German concept of Mittelstand (privately-owned companies larger than a mom and pop business) is not well understood in the US. Yes, they exist here all over the place, from small gas station and 7&11 chains to family-owned machine shops, document-shredding companies, health club chains and other small businesses.
The owners do not want to discuss their businesses. They have carved out a niche for themselves and are making good money.
Our company is almost 40 years old and was set up as a US-sales and service center for a family-owned Germany company. The US operation flourished and established its own identity. It went from building copies of the Germany products to developing its own products for the North American market.
The company to look to, as an example, is Stihl. If you have ever owned a chain saw and wanted the best, you bought a Stihl. Stihl set up shop in Virginia Beach, VA about 40 years ago and never looked back. Today, Stihl USA designs and builds special products for the North America market. What they sell here is different than what they sell in Europe or elsewhere. Stihl USA is the epitome of the declaration: Yankee ingenuity backed by German engineering. Today however, engineering prowess is also resident in the USA.
That is the same success story for our company. We design, build, install and service systems for the industrial distribution packaging industry. We are automation technology personified.
Our name is to our customer as Stihl is to the chainsaw user. It has taken us millions of hours of employee input to achieve the level of success we enjoy. Our average employee has been with us for more than 10 years. We treat out people well and all of us worship our customers. We charge the most and deliver the best. In the last 10 days, we booked 8 months of order backlog.
Awesome!
Suppose UPS and Fed-Ex merged. And they did not fire anyone. I don’t think that is job creation. Convincing many young people to be financiers in the 90’s was indeed job creation, because the Boomers thought they could get 12% annual return (long term average is 3%), and paid for it. So those jobs will only last as long as there is blood to suck. Likewise government jobs will only last as long as the dollar is the reserve currency and we can extend and pretend(tax revenues are not enough). I deeply admire the entrepreneurs that deal with the sovereign consumer. And I wish the original article from D&B had made this clear: 17% of 18.9millionx5(jobs lost in small businesses)=16 million jobs Gone. One percent of 19million companies times 288(total current middlesize company jobs)=54.72 million jobs NOW, but this is reflecting the increase of 86%(roughly from 29.4million). It seems that many of the jobs the middle sized companies created simply replaced the small jobs lost (29.4 +16=45.4), they were not icing on a wonderful jobs rich cake.
I live in Germany. The stress on US side is grow bigger as an ‘end all’. So much is missed with this focus. Mittelstand is a worthy target for anyone.
Indeed, but going large is the epitome of the american dream.
Mittelstand companies in the current high-tech infrastructure and tooling (IT capabilities, software, mfg. machinery, etc..) environment will eventually outcompete the larger and by crony capitalism propped up bureaucracies and careerist burdened enterprises.
Good riddance to the excesses and wasteful lifestyles they proliferate.
And conclude with: “Vorsprung durch Technik”