It is time for middle market companies to be taken out of the very broad SME category and treated as a separate category in their own right alongside smaller businesses and their larger, often listed, international counterparts. Middle-sized companies have become the Cinderella of the corporate world with their vital understated contribution to the economy often overlooked, rather like the forgotten middle sibling of tradition!
The middle market includes a diverse range of businesses. Some are entrepreneurially-led, others are family-owned and extend back a number of generations, and some are quoted, especially in the UK with our deep capital markets including the successful AIM growth market. As a result, we should be careful not to see the middle-market as just a staging post on the way from being a small business to a large corporate. Some will wish to make this transition but, for many, the middle market will be their preferred long-term home.
A healthy middle market sector is vital for the long-term health of the economy. The UK’s 34,000 mid-sized businesses provide 3.3 million jobs and turn over £541 billion per annum*. They are often key players in regional economies; they tend to create more jobs per £m of turnover than large global businesses , are key sources of innovation in many sectors, and generally make a significant contribution to the national taxation pot. Given their size, they have the potential to be more agile than the largest businesses and make a substantial contribution to the latter’s supply chains. They also have the built-in resilience from having successfully weathered the challenging early years of start-ups and in addition, for those that have been around for many years, the varying stages of economic cycles and the ups and downs of fortunes affecting their particular businesses.
With the globalisation of business, changing societal attitudes towards business in the wake of the financial crisis, and the Fourth Industrial Revolution brought about by technological change, the middle market is, however, at real risk of becoming the ‘squeezed middle’. As the largest businesses continue to strengthen their global footprint, middle-sized businesses are leading candidates for acquisition. At the other end of the size scale, small fast growing businesses at the leading edge of technology are attractive targets for leading players either seeking to gain access to their specific technology or, more broadly, to their expertise at innovation. This means that they are being acquired at an early stage rather than growing into the middle-sized enterprises that would have been historically expected. Meanwhile, some middle market businesses used to coping well in steady state conditions are finding it harder to keep up with a changing corporate environment. Global competition, corporate governance obligations, the pace of technological change and cyber security threats are all relevant and significant to the middle market. As a recent Mazars report shows, there is a very significant performance gap between the most successful middle-sized businesses and the majority: much of which is down to the former’s ability to successfully navigate a changing business environment**.
So, how do we address some of these issues? At a national level we can, whilst respecting differences in tradition and culture, look to learn from other countries with a successful record in nurturing middle-sized companies. Germany’s Mittelstand will always be be to the fore in such an exploration. A key area of interest will be how middle-sized companies can be encouraged to develop international sales and be supported in the process. Development of talent is also a critical factor: national schemes tailored to the needs of middle-sized businesses in this area will be vitally important.
For companies themselves, it is vital that their leaders work on the business and not just in the business. That is, that they should have a strong focus on their purpose, culture and strategy while simultaneously paying sufficient attention to driving innovation and to developing niche leadership positions.
The above were among the issues discussed at a roundtable held recently at the European Business Summit in Brussels to mark the European launch by Mazars and the Academy of Business in Society (ABIS) of their Middle Market Leaders Lab. This will look at how both governments and policy makers can help to create the right business environment for the middle market and, most importantly, the actions middle market businesses can themselves take in order to fulfil their potential. The UK launch of the Lab will take place later this year.
Some years ago E.F. Schumacher wrote the seminal work ‘Small is beautiful'. It is now time to recognise the magnificent middle market.
* House of Commons Business Statistics Briefing Paper, #06152, December 2017
**Mazars: How to Optimize Mid-Sized Business, October 2017