America’s economic recovery lies in the middle market

September 8, 2009

bonneytom5x5Thomas Bonney is founder and managing director of CMF Associates, a financial consulting, staffing and recruiting firm based in Philadelphia, PA, that serves private equity, middle-market and small-cap public companies nationally. The views expressed are his own.

In his 1988 Republican National Convention acceptance speech, George Bush championed the tradition of the American community, describing it as “a brilliant diversity spread like stars, like a thousand points of light in a broad and peaceful sky.”

More than 20 years later, this tradition still forms the core of our country’s strength – particularly the “thousand points of light” that comprise our medium-sized, family- and private-equity owned business community. I believe it is this community that will ultimately drive the tailwind of economic recovery and growth.

The economic healing power of these businesses is clear. According to the Small Business Administration, more than 6.7 million of the 27.2 million existing businesses in 2007 were small businesses with less than 500 paid employees. Just one hire by each of these firms would more than replenish the 6.46 million jobs lost since the recession began in December 2007 through June 2009.

Smaller companies continue to forge the strongest track record of job protection. The Labor Department’s Quarterly Business Employment data for Q4 2008 shows that, relative to the size of private sector employment, job losses at large companies were approximately one-third larger than losses in the middle market. Mid-sized companies with 999 employees or less accounted for 10.9% of job losses, while larger companies with 1000+ employees were responsible for 20.7% of job losses.

Middle market American leadership teams generally are innovators. The innovation we see on the ground is qualitative and anecdotal, but indicates a growing desire on the part of a subset of the middle market to begin to play some offense. This is not the sort of data that quickly moves through the labyrinth of channels used to generate state and federal government data that drives Wall Street and dominates media outlets; we expect that our qualitative observations will be validated in quantitative data by Q1 2010.

For instance, smaller companies are already taking the initiative to pick up the pieces of fallen “humpty dumpty” corporations. Many individuals displaced by larger organizations’ job-shedding are choosing to leverage their experience and relationships and start their own organizations which, in turn, will hire more employees. One example is a newly founded consulting firm that identifies orphan pharmaceutical compounds within large pharmaceutical companies, and connects them with middle-market companies whose cost structures are in line with the orphan compounds’ expected revenues.

Additionally, middle-market businesses are beginning to play economic offense in two other meaningful ways:

1.    Private equity funds and family business owners are pursuing add-on acquisitions and other mergers — targeting either weaker competitors or complimentary product lines/offerings. Jeffrey Ferro, COO of regional accounting firm Parente Randolph, confirms: “We see an opportunity to solidify our market position and expand into tangential geographic and service offerings; merger and acquisition opportunities are finding us and our recent merger announcement with Beard Miller is indicative of the types of situations we are confidently pursuing.”

2.    Middle-market companies are taking the initiative to upgrade the talent on their team. “The competitive environment has gotten significantly tougher,” says Reinhold Hesse, CEO of Massachusetts-based Extrusion Technology. “We have great products, good people and good positioning, but have to up our game to stay competitive. We’ve hired talent in a Chief Marketing Officer and are in the process of hiring a Chief Finance Officer.”

The missing ingredient in the middle-market’s promise for driving economic recovery remains the bank underwriter. Since the initial subprime crisis in August 2007, commercial lenders have not significantly engaged with middle-market businesses — even with groups demonstrating strong cash flow, competitive positions and products/services. The velocity of the middle market’s ability to grow and therefore to generate the tailwind of job creation rests with the confidence of American business leaders and within the memos coming out of local banks’ executive suites and underwriting departments. One motivating factor may be the pressure on individual bankers to deploy capital in order to get their (government-OK’ed) bonus.

The other significant wild card in the ability of middle-market American firms to get on with innovation and growth is the government’s changing role within the DOL, IRS, ERISA, DHS, and other agencies – an outcome that could carry significant positive or negative business implications. The best scenario for middle-market progression is gridlock in Washington, as well as delivery on a pledge George Bush couldn’t keep: “And the Congress will push me to raise taxes, and I’ll say no, and they’ll push, and I’ll say no, and they’ll push again, and I’ll say to them, “Read my lips: no new taxes.”


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Small business may be the backbone of the economy….but with Obama’s current policy of “insourcing”…converting contracted gov’t service functions back to “civil service”…..small businesses, and large….are being put out of business…at higher costs for wages and benefits to those civil service jobs….just to say “we/the gov’t, created X amount of jobs!! When will anyone wake up and start talking about this? My company has 100 jobs, and at the end of the month…after 27 years as a small business…I’m OUT OF BUSINESS….due to “insourcing”.

Posted by Steve Westerlund | Report as abusive

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Posted by Economic recovery depends on health of small companies | Blogs@Allectus | Report as abusive

Small Businesses are the backbone of our economy. The current difficulty in raising funds speaks to expansion difficulties as well as payroll considerations.

However, with an effective team culture, many small businesses are discovering a wealth of opportunity in spite of the economic downturn. And, these companies do not have difficulty in attracting and retaining talent.

In my new book, TIGERS AMONG US: Five Winning Business Team Cultures & Why, I discuss the dynamic of employees treating the business as if it were their own and what this means to productivity and expansion – including training and development and securing health care benefits.

For those small businesses that do not have an authentic business team culture, I agree with your premises. However, I would take it a step forward and suggest that dissatisfied talented employees are biding their time until new opportunities arise. Therefore, expansion through learning is critical.

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Posted by America’s economic recovery lies in the middle market | Report as abusive

As a Doctorate student, my current class right now is based on leadership and innovation. Secondly, I have worked in the corporate sector as a programmer which I believe in fully. At the same time I also have full belief that our small business sector is the only thing that will bring the destruction which it has faced.

If anyone considers that we as citizens, did not ask for the financial diaster that occurred. There are things that persons fail to realize everytime when this is discussed.
This is a two part issue which is A) the banks that provided those loans and B) persons who received those loans. Part One – the banks that did provide those housing loans either 1) knew the ramifications of the ARMs but did not care, 2) were not trained correctly, or 3) were informed by higher ups to wait for better offers before accepting any payments from those who had loans taken out.

What all of the above did was set the wheels in motion for a lot of difficulty and hardship on persons who needed to make mortgage payments. There were some underwriters who chose to provide loans to persons who did not qualify which also led to another set of issues as when the ARMs came to their ending period, the home owner was unable to refinance at a reasonable price due to their credit. So those with bad credit added on to the already above issue and it snowballed causing the need for smaller banks being shut down, bought out, and a force of printed money which we do not have.

Just trying to explain all of it makes my head spin. Hopefully I have tied up everything into a bow and gotten it correct. The best that can be done now is to move forward and recover with small business as our citizens must be hired within the United States, not overseas to regain fiscal responsibility and put people back to work in the private sector.

I appreciate corporate business but I have a deeper appreciation for smaller business as they are the persons who begin with just an idea and turn it into reality.

Posted by Sue Elvins | Report as abusive

Good article. Interesting that a successful company in the extrusion business would not have had a Chief Marketing Officer, or someone with a less lofty title doing that job. Business do best when critical business activities are based on proven effective systems and processes. For more on this see m/systemize.html and there is no activity more critical to any business than attracting customers and monetizing them. I wonder how many businesses are floundering or treading water because they lack proven marketing and selling systems and processes? Or someone to develop and drive them?

Posted by Martin Schultz | Report as abusive

It’s a good point brought up in the article – about laid off individuals starting their own companies, leveraging the experience they acquired while working for a large corporation. It’s definitely a better option to sitting home and feeling depressed that no one hires you with your brilliant skills and impressive experience. The recession benefits these new entrepreneurs in a way that once they lose their jobs, they have so much time to reconsider their life goals and think about other options, than just jumping into another dead end job.

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