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This is Capitalism: Up Close, Inspired, Explained


Apr 29, 2019

Tom Stewart is Executive Director for the National Center for the Middle Market, which is part of the Fisher College of Business at The Ohio State University. It’s the leading source of information and research on the companies whose output accounts for one-third of the private sector in the U.S., the middle third of the U.S. Gross Domestic Product. These are firms that have grown out of being small businesses but with their revenues running between $10 million and $1 billion a year, they’re still a long way from being in the Fortune 500. And no one shines a brighter light on the middle market companies than the National Center’s Tom Stewart, “Mr. In-Between.”

 

Key Takeaways:

[:20] Ray Hoffman introduces Tom Stewart.

[1:15] Tom Stewart defines the middle market as companies with annual sales between $10 million and $1 billion. These range from the largest of small businesses to companies that start to resemble the Fortune 500. There are some interesting transitions along the way as companies grow.

[2:21] The National Center for the Middle Market considers these companies in three different revenue groups: Between $10 and $50 million, between $50 and $100 million, and between $100 million and $1 billion.

[2:41] Somewhere around $50 million in revenue, companies begin to need to create functions. They can no longer make do with the accountant at the accounting firm that they use; they need a Chief Financial Officer. They need a person to be in charge of HR.

[3:16] At a little over $100 million in revenue, the functions get deeper with more expertise in HR beyond a couple of generalists doing payroll and job descriptions. The same goes for finance and other functions. Along the way, you are likely to get more P&Ls. You get functionalization and divisionalization.

[4:06] They may begin to think about international expansion and what that means in terms of the skills and capabilities they will need to enter those markets.

[4:20] Since the center started in 2011, they started with these three logical revenue differentiations. Over time, it has become evident that the differentiations roughly correspond to major inflection points in a business.

[5:04] Within the group of roughly 200,000 middle market companies, only about 15% are public. 85% of middle-market companies are private. About a third of the 85% are family businesses; about a third have private equity investment; about a third are “other,” which may be sole proprietorships, partnerships, or closely-held corporations.

[5:55] 65% of family business owners expect to pass the business to their children; only about 30% pass the business to their children. The next generation is down to about 12%. Family businesses often cease to be family businesses. They may get sold.

[6:34] The median age of middle market companies is 31 years. There are transitions that occur as they grow and age.

[7:03] During the financial crisis, middle market companies were much more likely to survive than small businesses. The vast majority of middle market businesses that survived actually added jobs while big companies were cutting.

[7:30] 60% of net new job growth in the U.S. is in middle market companies. They are the forgotten middle child of job creation. It’s a mostly untold story of capitalist success because they are not found making moves in the stock market.

[9:01] Most businesses die within six years of their founding.

[9:30] Every three months, the center sends out a survey to middle-market companies in all industries, in all parts of the country. They get 1,000 responses. The questions are about top-line and bottom line, revenue growth, employment growth, investment plans, investment results, and biggest challenges. The center has eight years of data.

[10:11] The center recently took data from five years (20,000 company surveys) and did a factor analysis and a Bayesian statistical analysis. They were able to identify the key factors that drive growth for these companies. They created a cluster analysis for types of growth coming from various factors.

[10:54] The center created ‘portraits’ of the styles of growth of these successful middle market companies, based on the decisions the companies make or the paths they follow.

[11:20] The beginning of the National Center for the Middle Market came from GE Capital coming out of the financial crisis with a lot of interest in the middle market. As there are only 500 Fortune 500 customers, many financial services companies wish to work with the potentially lucrative middle market.

[11:44] GE Capital approached a number of business schools, including Fisher College of Business at The Ohio State University to do a study of the middle market. Fisher replied, “We see you, and raise you. Anybody can do a study, but why don’t we actually create a research center so that there’s an ongoing stream of studies?”

[12:08] GE sold off most of its Capital division, starting about four years ago. Now the center is sponsored by Cisco Systems, GrantThornton, and Chubb Insurance. The center works with outside organizations like Brookings.

[12:27] Middle market companies have ‘big-company’ problems and ‘small-company’ resources. Finding the ‘stuff’ that really helps them address their challenges is one of the most important contributions the center makes.

[12:48] Tom Stewart talks of his background working with large companies. When he moved to the National Center for the Middle Market, he discovered an extraordinary universe with some of the most interesting companies with interesting challenges. Middle market companies generally outperform S&P 500 companies by up to 2%.

[15:00] Some companies move up in the middle market. Tom calls them the ‘graduating classes.’

[15:14] Tom Stewart and Ralph Greco reported on a study about if companies are keeping up with digitalization or falling behind. Getting up-to-speed is time-consuming. Tom shares the percentages of digital spending, past and predicted. There are four types of companies: strategic, advanced, defensive, and deniers. Strategic is best.

[17:51] In the 4th Quarter of 2018, 71% of middle market companies were planning to invest, with a large percentage of investments going toward IT. Cybersecurity is the biggest technology priority for many of them. Companies that prioritize cybersecurity for customer data grow faster than those that do not.

[20:08] People are now distinguishing between three things: digitization from legacy data on paper, digitalization of the whole business process, and digital transformation in which you think of the whole business as being digital, first. More companies are moving from one level to the next, connecting the dots to arrive at digital transformation.

[21:48] As executive teams age, they sometimes may also be more interested in harvesting than in planting. That’s when private equity investors start coming in to grow them.

[22:46] Middle market companies that are using technology as a cornerstone grew at an average 10% rate in 2018. The ‘laggards’ who haven’t connected the dots grew only at a 6% rate. As the years pass, growth rates and the advantages of the technology will compound for the forward companies. Tom gives examples of high-tech companies.

[24:14] Tom reflects that before he started with the center he was unaware of the landscape of middle market companies that opened before him. He says policymakers don’t understand and are not being told the stories of middle market companies.

[25:15] 47% of mid-size companies report that the lack of talent is restraining their growth. Google doesn’t have a shortage of job applicants. Everybody knows about Google. There are some extraordinary opportunities in mid-market companies and that story needs to be told so the talent can find the opportunities in these companies.

[25:38] Varidesk furniture, every sports team, craft brewers, and more are all found in the middle market sector.

[26:29] Tom looks forward to more interactions between companies to use tools, create knowledge, and share knowledge. The center can provide academic rigor but also an opportunity for people to share and talk. Tom wants to see more talking about the data while continuing to create a body of knowledge about middle market companies.

[28:01] Tom wants to apply this body of knowledge to help these companies perform even better. Tom’s third hope is for more connections with policymakers, on one hand, and the global community of middle market companies, on the other hand.

[28:57] The core work of prosperity in communities and cities is helping the companies that are already there to grow. Part of that is identifying the middle market companies. Public investment is needed there to help everybody living in those communities.

[29:28] This is Capitalism, with “Mr. In-Between,” Tom Stewart.

 

Mentioned in This Episode:

Stephens.com

Thomas A. Stewart

Fisher College of Business at the Ohio State University

Fortune 500

Bayesian Analysis

Cluster Analysis

GE Capital

Cisco Systems

GrantThornton

Chubb Insurance

Brookings

Booz & Company (now Strategy&)

Harvard Business Review

Fortune

S&P 500

How Digital Are You? A conversation with Thomas A. Stewart and Ralph Greco, on YouTube

5G

GPS

Lyft

Uber

US Small Business Administration (SBA)

K Street

Varidesk

Germany's Mittelstand

This Is Capitalism