# Understanding Middle Market Firms: Definition, Criteria, and Trading

## What Is a Middle Market Firm?

Middle market firms, with annual revenues between $10 million and $1 billion, are integral to the U.S. economy. Comprising about 200,000 firms, these privately held or closely owned companies contribute over $10 trillion in annual [revenues](https://www.investopedia.com/terms/r/revenue.asp) and support approximately 48 million jobs. They are essential for job growth and are primarily service-oriented businesses.

### Key Takeaways

*   Middle market firms generally have annual revenues between $10 million and $1 billion, playing a vital role in the U.S. economy.  
    
*   Approximately 48 million Americans work for middle market companies, contributing to about one-third of the U.S. private sector's gross receipts.  
    
*   These companies often rely on business development corporations (BDCs) for funding and are frequently categorized as small-cap or micro-cap stocks when publicly traded.  
    
*   Middle market companies face challenges like maintaining customer relationships and managing workforce disruptions, which were exacerbated by the COVID-19 pandemic.  
    
*   The middle market sector typically includes service-oriented businesses in industries such as health, education, and business services.

## The Role of Middle Market Firms in the U.S. Economy

Middle market companies are responsible for about 48 million jobs with combined annual revenues of $10 trillion (which accounts for about one-third of annual U.S. private-sector gross receipts). That makes the middle market a powerhouse of the U.S. economy, though many of these companies are little known to the general public.

The middle market is vital to the U.S. economy, creating jobs at more than twice the national average rate. Many middle market companies focus on [service](https://www.investopedia.com/articles/personal-finance/090815/basics-business-development.asp)s like business, health, and education. Many are also involved in retail, wholesale, construction, or manufacturing.

## Defining Characteristics of Middle Market Firms

There is no universally accepted definition of the middle market. Traditionally, annual revenue defined middle market status. The Harvard Business Review defines the middle market as those businesses that earn between $10 million and $1 billion in annual revenue. Other sources may place the lower threshold as low as $5 million, or as high as $50 million.

Some analysts use total asset value to define middle-market firms. Others characterize the middle market as companies with between 500 and 1,000-1,500 employees. By this reckoning, small businesses have 500 or fewer employees.

The unclear definitions can blur lines when categorizing businesses as small, middle market, or big. Some cut the categories down to two and label all but the biggest businesses as [small and medium-sized enterprises](https://www.investopedia.com/terms/s/smallandmidsizeenterprises.asp) (SMEs).

> **Fast Fact**
>
> The U.S. middle market generated about $10 trillion in combined revenues in 2021. If the U.S. middle market were a country, it would have the third-highest GDP in the world.

## Key Challenges Faced by Middle Market Firms

The interests of middle-market businesses may be relatively under-represented in policy and economic debates, from the local level to internationally. Most big businesses are [publicly traded companies](https://www.investopedia.com/terms/p/publiccompany.asp). They report financial information quarterly and employ lobbyists to represent their interests. Small businesses have associations that represent their interests.

In contrast, the middle market is less defined and transparent. These firms are low-profile, with products known mainly to their customers.

The COVID-19 pandemic also hit SMEs especially hard. In fact, 43% of middle-market executives believe the pandemic will have some adverse effects on revenues in 2021. Even discounting the effects of the pandemic, significant challenges remain. According to a 2021 report, maintaining customer relationships continues to be difficult, with a majority of middle-market executives citing this as one of their top challenges right now.

Managing workforce disruption and keeping employees engaged and productive also continues to be an ongoing problem for middle market leaders.

### How Middle Market Firms Secure Funding

Middle-market businesses often struggle to raise capital and face higher debt costs than large public companies. While boutique banks compete for middle-market business, larger companies benefit from [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp). Many theories explain why this is the case but it often boils down to the added transaction costs banks undertake for due diligence and marketing activities when they cater to the middle market.

Middle market companies often look to [business development companies](https://www.investopedia.com/terms/b/bdc.asp) (BDCs) for funding. These are similar to closed-end investment funds. Many BDCs are public companies traded on major stock exchanges. As investments, they can be somewhat high-risk but also offer high dividend yields.

To qualify as a BDC, a company must be registered in compliance with Section 54 of the [Investment Company Act of 1940](https://www.investopedia.com/terms/i/investmentcompanyact.asp). It must be a domestic company whose class of securities is registered with the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC).

By regulation, a BDC must invest at least 70% of its assets in private or public U.S. firms with market values of less than $250 million. The companies they invest in are often young businesses in need of financing or companies that are struggling to emerge from financial difficulties. The BDC is required to provide managerial assistance to the companies in its portfolio.

## Opportunities and Risks of Investing in Middle Market Firms

Most middle-market firms are not publicly traded, but they can be found among [small-cap](https://www.investopedia.com/terms/s/small-cap.asp) or [micro-cap](https://www.investopedia.com/terms/m/microcapstock.asp) companies. Middle market companies are not usually considered big enough to be [mid-cap](https://www.investopedia.com/terms/m/midcapstock.asp) stocks, which are defined as having a market capitalization between $2 billion and $10 billion.

There are several a number of [exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs) and mutual funds that focus on small-cap indexes including the [Russell 2000](https://www.investopedia.com/terms/r/russell2000.asp) and the [Russell Microcap Index](https://www.investopedia.com/terms/r/russell-microcap-index.asp).

Investors may also be able to invest directly in the shares of business development companies that provide financing to middle-market firms. Because BDCs are [regulated investment companies](https://www.investopedia.com/terms/r/ric.asp) (RICs), they must distribute over 90% of their profits to shareholders. That RIC status, though, means they don't pay corporate income tax on profits before they distribute them to shareholders. The result is above-average [dividend yields](https://www.investopedia.com/terms/d/dividendyield.asp).

According to BDC Investor.com, as of June 2021, the ten highest-yielding BDCs were posting yields from 9.19% to 21.99%.

## Comparing Middle Market Firms to Main Street Businesses

Main Street is an informal term for small businesses with a relatively small number of employees that take in a modest amount of revenue. Middle market firms are larger, with more staff and revenues in the tens to hundreds of millions annually.

The middle market consists of companies that would make up small-cap and micro-cap stocks if they were listed on a stock exchange. These can be riskier than holding shares of larger, more mature companies, which tend to be more stable. At the same time, the growth opportunities and ability to be nimble can often be greater for the middle markets, providing higher potential returns.

## What Is Middle Market Banking?

Middle market banking refers to an area of commercial banking that provides services to local governments, nonprofits, and companies with around $50 million to $1 billion of total revenue. In order to serve these clients, middle-market investment banks may need to specialize in specific areas of expertise.

## What Is Middle Market Private Equity?

Middle market private equity refers to the sector of [private equity](https://www.investopedia.com/articles/financial-careers/09/private-equity.asp) businesses that invest in companies worth between $50 million and $500 million. Companies in this range tend to be well-established, without the risks of investing in a small startup.

## What Is the Lower Middle Market?

The lower middle market is a smaller subset of middle-market firms, with a total valuation between about $10 and $100 million dollars. Because of their small size, these firms tend to be more attractive for mergers and acquisitions that the rest of the middle market.

## The Bottom Line

Middle market firms play a crucial role in the U.S. economy, accounting for about one-third of its activity and providing approximately 48 million jobs. With revenues ranging from $10 million to $1 billion, these mostly privately-owned companies are often service-oriented and less visible outside their industries. Despite challenges in capital access compared to larger enterprises, middle market firms offer unique growth opportunities, often supported by Business Development Companies (BDCs). Investors can explore investing indirectly in these firms through small-cap and micro-cap stocks or directly via BDC shares, which frequently yield high dividends.  

> **Article Sources**
>
> 1.  National Center for the Middle Market. "[Year End 2021 Middle Market Indicator](https://www.middlemarketcenter.org/Media/Documents/MiddleMarketIndicators/2021-Q4/FullReport/NCMM_MMI_YEAR-END_2021_web.pdf)," Page 3.
>     
> 2.  American Express, Dun & Bradstreet. "[The Middle Market Power Index: Economic Might of Middle Market Firms](https://ventureneer.com/wp-content/uploads/2018/02/Amex-DB-MMPI-1-8.1.17-FINAL.pdf)," Page 2.
>     
> 3.  Harvard Business Review. "[The Middle Market Is Stressed, but Resilient](https://hbr.org/2021/03/the-middle-market-is-stressed-but-resilient)."
>     
> 4.  World Population Review. "[GDP Ranked by Country 2022](https://worldpopulationreview.com/countries/countries-by-gdp)."
>     
> 5.  National Center for the Middle Market. "[Covid-19 and the Middle Market: 4Q 2020](https://www.middlemarketcenter.org/middle-market-research-reports-full-research/covid-19-and-middle-market-companies-4q-2020)."
>     
> 6.  U.S. Securities and Exchange Commission. "[Investment Company Registration and Regulation Package](https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504htm.html)."
>     
> 7.  U.S. Securities and Exchange Commission. "[Investor Bulletin: Publicly Traded Business Development Companies (BDCs)](https://www.sec.gov/oiea/investor-alerts-and-bulletins/investor-bulletin-publicly-traded-business-development-companies)."
>     
> 8.  BDC Investor. "[Full Business Development Company List](https://www.bdcinvestor.com/business-development-company-list/)."
>     
> 9.  Accounting Tools. "[Middle Market Banking Definition](https://www.accountingtools.com/articles/what-is-middle-market-banking.html#:~:text=Middle%20market%20banking%20is%20the,carve%20out%20defensible%20market%20space.)."
>     
> 10.  BGF Explains. "[What Is Middle Market Private Equity?](https://www.bgf.co.uk/insights/bgf-explains-what-is-mid-market-private-equity/)"
>      
> 11.  Benchmark International. "[Why Middle Market Firms Are Attractive to Buyers](https://blog.benchmarkcorporate.com/why-lower-middle-market-companies-are-attractive-to-buyers)."