How to Break out of the Middle Market

Unfortunately, there is something very illusive about taking your company from good to great. It’s not just about the “Level 5 Leaders” spoken of in Jim Collins’ book, but there are oftentimes many more operational components at play, the proverbial management troughs or what Geoffrey A. Moore refers to as “The Chasm.” In this case, it’s not the chasm of taking your product to the mainstream, but busting out of the lower middle market to the upperĀ echelonsĀ and beyond. Here are a few pointers on how to start the coup.

The best way to reach a break through is to overcome what Verne Harnish refers to as Valleys of Death, those areas of employee, customer and revenue plateau that mean the difference between taking things to the next level or hunkering into the status quo. In Harnish’s mind, there are several areas of plateau (seen explicit in the graph below) which we’ll mention and discuss.

2 to 3 Employees. The first trough is generally a decision based on time, quality of life and whether or not the entrepreneur wants to make a great company or simply. This stage is perhaps the easiest to break into, but the most difficult to hurdle. In short, it’s the most difficult plateau in the entrepreneur’s own corporate latter, with only 4% of businesses breaking into the next level.

10 to 12 Employees. This is where the entrepreneur is able to make a good living and has built a great team of helpers, but has generally not brought on real managers with drive, tacit-knowledge and managerial skill to take the company to the next level of operational success. This is a tenuous crossroad for the entrepreneur who generally reaps the rewards of at least a few million in annual revenues, but whose business will require more investment and time to break into the next level.

~50 Employees. While many stalwart businesses strive for the circa-50 mark, a rare few actually make it. Most companies require several attempts before they make it to the 50 mark. They’ll jump to 20+ and then fall again back to the 10 to 12 number until they are finally able to push above. Only about 0.4% of the original group ever make it to this level.

Here is perhaps the biggest difference between 10-12 and the 50 mark: management. When you run a dozen or so employees, it’s easy for a single owner to keep track of most of the companies sales, operations, etc. At around the 50 mark, the company becomes an unwieldy beast, requiring the original entrepreneur to shift priorities and delegate like a leader. The struggle is that without great management in place, delegation will often not lead to the successful growth one seeks.

To Get to ~50

Perhaps the biggest motivation to get to the ~50 employee mark is the ability to sell your company for more money. In striving to make it to the coveted 50 mark, companies need to overcome the following obstacles:

  • Find and keep great management. This means a large portion of revenues and/or stock-based compensation will need to be diverted toward hiring some seasoned management.
  • Delegate, delegate, delegate. Pass on as many responsibilities as possible to the managers hired, especially the management of front-line staff. Getting unstuck and out of the stagnated trough requires management with delegated responsibilities who can take over when entrepreneurs are not present.
  • Communication. Getting to the 50 mark requires a great deal more of good communication between first and second tier management and the front line. It tends to get more hairy with more employees. Learning how the chain of command is delegated and where the lines of communication work best is essential.
  • Focus on sales. Regardless of the line of business, breaking into and out of the middle market requires greater revenue per employee. Reinvesting profits in better management and more employees in general requires a focus on sales and bumping up revenue to create a buffer, unless of course you feel the need to raise capital, go after VCs or private equity.
For the pragmatist, growing the business is a sure-bet towards greater profits, but perhaps the biggest boon of breaking into and even out of the middle market is what it means when you put up the FOR SALE sign in the yard: higher multiples, better returns and an overall divestiture that would make anyone salivate.


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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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