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The middle market has been on the rebound, with nearly 4 out of 5 businesses reporting revenue gains in 2021 and 57% of middle-market firms expanding the size of their workforce (National Center for the Middle Market).

For insight to key trends in the marketplace, Crain’s Content Studio spoke with three experts: See below for Partner, Kevin Burns' comments:

1. In what ways did middle-market businesses use the time during the pandemic to shift strategies and improve their operations?

While the Paycheck Protection Program and Employee Retention Tax Credits, along with other benefits of the Cares Act and Consolidated Appropriations Act, assisted many companies and kept them afloat, these were only temporary and-or partial solutions. Companies really had to take a hard look at their business strategies and adjust them where necessary. These adjustments included shifts in their customer base, how products or services are sold, how they reach customers, how they acquire and retain talent, and how they adjust budgets and preserve cash flow. Companies without a large online presence quickly shifted to building one, and companies that did not have the infrastructure to work remotely quickly put one in place. A remote environment allowed companies to compete for customers outside of their geographic markets. This environment also allowed these companies to identify and hire talent in other markets. With changes such as these, these middle-market businesses that may have previously considered themselves local or regional have now become national.

In a remote environment, firms also significantly reduced certain expenses, such as travel, meals and entertainment. Many companies reduced or subleased their office space and shifted to a hybrid or a fully remote model. As the impact from the pandemic started to subside and businesses gradually resumed normal operations, many companies maintained many of these changes. Companies, however, need to continue to evolve and consider that what worked during a shutdown is not necessarily indicative of what will work as they resume normal operations. They need to find the right balance, which is something we work with our clients on.

2. How are middle market companies handling the high inflation numbers we are currently experiencing?

Soaring costs for goods and services are affecting how middle-market businesses view their bottom line and the steps they need to take to succeed and grow. Our clients are addressing inflation through a combination of price increases and cost cutbacks. However, cost increases can only be made to the extent the market will bear. To remain competitive, many businesses will also reduce costs to preserve or sustain profitability. This creates an interesting dynamic because not all costs are ripe for trimming. Rising wages, an unprecedented rate of employee resignations and an inability to find qualified talent are major issues aggravated by inflation. To combat this, companies are paying retention bonuses and-or giving significant raises to retain their workforce, which means they need to try to cut costs in other areas. We are working with our clients to identify those costs that can be cut and finding innovative ways to get more for less. For example, hedging commodity purchases, such as lumber for homebuilders.

3. How have middle-market companies with international operations been affected by the war in Ukraine?

First and foremost, the humanitarian consequences of this war far exceed the negative impact that the war has had on commercial enterprise. That said, from a business standpoint, many companies that previously had a presence in Russia have since cut ties to comply with established sanctions, as well as to show their support for Ukraine. Where possible, and in some cases where necessary, companies are moving their international operations into other countries, or at a minimum, exploring alternatives. The war has also contributed to the supply-chain issues, which has resulted in companies becoming more flexible and creative in managing their supplier relationships.

4. Has there been a shift in the sources of capital middle-market businesses are turning to? What are seeing in the market?

Private equity has definitely become a source of capital for middle-market firms. The level of private-equity investment that we are seeing is unprecedented and enables many of our clients to execute against aggressive growth strategies, including making strategic acquisitions; this has allowed them to expand their geographic footprints, grow their customer base and leverage operational synergies.

Private equity has also provided strategic direction. Through sophisticated strategic planning and operational analysis, middle-market businesses can expand service offerings and product lines, identify and develop alternative processes, and use technology to make them more competitive.

Outside of private equity, many of our clients continue to work with middle market-friendly banks to access more traditional sources of financing, including lines of credit, term loans and asset-based loans, which will continue to be great sources of capital for the middle market.

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