If you’ve been researching how to buy or sell a business, you’ve probably come across terms such as “main street business", "lower middle market business,” and “middle market business.”
Businesses are typically classified based on their revenues. Definitions can vary depending on who you ask, but the general consensus looks something like this:
- Main street - Up to $1M in revenue
- Lower middle market - $1M to $50M in revenue
- Middle market - $50 million to $500 million in revenue
Let's start by taking a look at the lower-middle market range. It's a pretty big gap, right?
If you own a business doing $2 or $3 million in revenue, you probably don’t feel like you’re on the same playing field as a business doing $35 or $40 million.
This gap in revenues can mean the difference between a business with a handful of employees versus one with more than a hundred.
It can also be the difference between being approached by individual buyers versus private equity and strategic buyers, and several other important factors. Yet, your $4 million business and the one doing $65 million are categorized the same way.
This is where a fourth category, the "MidStreet business", comes in.
In this blog, we’ll discuss where MidStreet businesses fall within these categories, and why it matters when you’re picking a business broker, M&A advisor, or investment banker.
Let’s get started.
MidStreet Businesses Defined
MidStreet businesses fall between main-street and middle-market businesses.
A MidStreet business is defined as any business having from $1 million to $25 million in revenue.
We’ve seen MidStreet businesses in industries such as manufacturing, business to business services, distribution, and home services, but it’s important to remember that industry isn’t the defining factor. Main street, MidStreet, and middle market businesses are all categorized based on their revenues.
Determining the size of a business doesn’t just give you an idea of what it will be worth, it will also help you figure out what kinds of buyers you’ll attract, and what kind of intermediary you should use to sell.
Let’s take a closer look at each of these categories and break down what potential buyers and intermediaries are associated with each.
Envision the main street in your favorite town. You're likely to see a flower shop, a dry cleaner, a service station, a deli and a couple restaurants. These are examples of “main street” businesses.
While the picturesque main street scene contributed to the naming of this size category, location isn’t the indicator here.
Main street businesses are categorized as such because they typically generate less than $1 million in revenue.
Since these businesses are smaller, they usually attract individual buyers who are using their own funds combined with an SBA 7(a) loan to purchase the business with the intention of taking over operations after the sale.
MidStreet businesses are the next size up from a main street business, and generate between $1 million and $25 million in revenue.
The MidStreet category distinction is necessary to help differentiate the services and expertise needed when selling a business.
With MidStreet businesses, buyers can vary, but it all depends on where the business lies on the MidStreet spectrum.
Businesses with between $1 million and $5 million are typically sought out by individual buyers. Why? The Small Business Administration only issues loans up to $5 million.
As revenues go beyond $5 million, strategic buyers and private equity groups tend to enter the market.
An individual buyer would need a substantial amount of capital to purchase a business valued over $5 million.
MidStreet businesses are typically sold by either business brokers (at the lower end of the revenue scale) or M&A (Mergers and Acquisitions) advisors.
Next up are middle market businesses. These businesses are doing $25 million or more in revenue.
Middle market businesses are almost always acquired by private equity funds or strategic buyers.
Private equity and strategic buyers are usually experienced in business acquisitions and have the funds on hand to make it happen. Strategic buyers are usually looking to expand their current operations, while Private Equity buyers are typically looking to increase the business’s value and sell in three to seven years.
When it comes time to sell a middle market business, you'll want to engage a M&A advisor or boutique investment bank.
Selling Your Business
Whether your business is classified as main street, MidStreet, or middle market, it’s important to understand the types of buyers you'll need to attract and what intermediary is best for you.
When looking for an intermediary to help you through the sale of your business, you want to make sure that you’re prepared with the right questions to ask. Don’t know where to begin? Let us help! We’ve developed a list of questions that you can use to interview intermediaries and find the best one for your business.
Click below to download yours.
Another big part of this process is understanding the true value of your business. If you need help getting started, contact us for a free business valuation today, and as always, reach out with any other questions you may have.