The burgeoning service economy is significantly outpacing more traditional industry sectors in its rate of business growth among middle market companies, according to the Middle Market Power Index: Exploring Generational Changes in Middle Market Industries from American Express (NYSE: AXP) and Dun & Bradstreet (NYSE: DNB).
While manufacturing and wholesale trade continue to remain key industries for middle market companies, the index shows a gradual shift in the industry composition of the middle market sector, defined as those with revenues between $10 million and $1 billion, with service businesses quickly gaining ground. Service businesses formed in the last 10 years are showing ability to scale into the middle market at a greater rate than more traditional industries. The business services industry consists of a varied list of enterprises such as public relations firms and advertising agencies, management consulting, legal services, landscape/architecture services, and interior design firms.
Over half (54%) of middle market enterprises are found in four industry sectors: manufacturing (17%), wholesale trade (13%), retail trade (12%) and business services (12%). Seventeen percent (17%) of middle market firms in business less than 10 years are in business services, indicating this sector plays host to our next generation of businessmen and women, a trend that is likely to continue as the Millennial generation further develops their careers. Alternatively, only 5% of middle market firms in business 50 years or longer are in the business services sector.
“The fourth Middle Market Power Index report shows an important evolution for the future of the middle market,” said Susan Sobbott, president, Global Commercial Payments, American Express. “While manufacturing and wholesale trade are still foundational pillars of middle market companies, business services is an industry of choice for the next generation of middle market entrepreneurs.”
“The increase in the number of service industry firms moving from small enterprises into the middle market reflects what is happening in the larger economy,” said Jeff Stibel, vice chairman of Dun & Bradstreet. “While manufacturing continues to be a critical piece of our economy, we are moving to a technologically-advanced service economy and these younger middle market firms are both driving growth and, importantly, creating significant numbers of new jobs.”
U.S. Geographic Locations for the Next Generation of Middle Market Firms
The youngest middle market firms, which potentially represent hotbeds of entrepreneurial growth in the middle market, are more likely to be found in the following four states, and the District of Columbia. Nationwide, middle market firms that have been in business less than a decade represent only 11% of the middle market, while these states (and District) are home to an above-average share.
- Texas (16%)
- Nevada (16%)
- Colorado (15%)
- District of Columbia (15%)
- Utah (14%)
Among states with a higher share of middle market firms that have been in business for 50 years or more, two states stand out – Iowa and Vermont. In Iowa, 49% of middle market firms have been in business for 50 years or more, significantly above the national average of 19%. In Vermont, a disproportionately low number of middle market firms have been in business less than a decade – just 4% compared to the national average of 11%.
Tenure in Business is Not Indicator of Middle Market Size
While middle market firms are defined as those with revenues between $10 million and $1 billion, most (51%) generate revenues between $10 and $19 million. But crossing the $10 million threshold takes time – those that have been in business less than a decade only make up 11% of the total middle market. On average, middle market firms have been in business for 42 years.
Conventional wisdom has dictated that nothing beats experience as a means of guaranteeing success, but the analysis shows that while it takes time to grow into the middle market, more business experience does not necessarily lead to increased firm size. Across generations, the size of middle market firms does not change substantially as businesses gain years of market experience. Middle market firms in business for less than a decade represent 11% of middle market firms, 12% of middle market firm revenues, and provide 11% of middle market jobs. At the other end of the business age spectrum, middle market firms that have been in business for 50 years or more represent 30% of middle market firms, generate 34% of middle market firm revenues, and provide 35% of middle market jobs.
Women-Owned and Minority-Owned Middle Market Businesses
Overall, women-owned and minority-owned companies are just as likely to be found in the middle market as are all commercially-active business owners. Among firms that have been in business between 10 and 29 years, women-owned and minority-owned companies are even more likely to be prevalent. Overall, 5% of middle market firms are majority-owned by ethnically diverse owners, yet in the 10-29 year range, 8% are majority-owned by women or ethnically diverse owners. These numbers complement the growth into the middle market among women-owned and minority-owned companies, which was identified in the third report of the Middle Market Power Index series.
Study Methodology
The Middle Market Power Index report is based on an analysis of 19 million (18,950,877) firms from Dun & Bradstreet’s US commercial marketing database between 2008 and 2014: the first a virtual census of all of the commercially-active businesses in the United States (defined as firms that have obtained a D-U-N-S® number and that sell and receive goods and services and utilize credit transactions in their business); the second their credit scoring archive database, which collects and models business commercial activity and business financial strength. All subsidiary and business establishment data are combined; only enterprise-level data (top of the business family tree, or Ultimate D-U-N-S® number firms) are reported. Additionally, public sector entities are excluded.