Tom Stewart, Executive Director of the National Center for the Middle Market at the Ohio State University, Returns

This is Capitalism: Up Close, Inspired, Explained

Patricia O’Connell interviews Tom Stewart, Executive Director of the National Center for the Middle Market on their latest survey of middle-market businesses during the COVID-19 pandemic. Tom describes the work of the National Center for the Middle Market and then explains how the middle market has changed between the March survey and the June survey. Tom suggests what the recovery will look like and that we should expect a ‘new different,’ not a ‘new normal.’Listen in to understand what middle-market businesses are experiencing now.

Key Takeaways:

[:34] Patricia O’Connell introduces Tom Stewart and asks him about the work of the National Center for the Middle Market.

[1:10] The National Center for the Middle Market is a research group at the Fisher College of Business at Ohio State University and is the nation’s only academic research center focused on mid-sized companies with annual revenue between 10 million and a billion dollars a year.

[1:34] That group is the middle third of the U.S. GDP. It’s a couple hundred thousand companies, and as the Center has documented over the years, actually the most dynamic part of the U.S. economy in terms of growth, as measured by the middle market indicator, a repeated survey of 1,000 middle-market companies.

[2:20] Middle-market companies are one-third of the private sector and produce 60 percent of new jobs, much faster than small or large businesses. The middle market is more resilient than small businesses.

[3:26] The Center took a survey of 600 companies during the first two weeks of June. Tom describes some of the differences between the same businesses’ responses to the June survey, the March survey, and the December 2019 survey.

[4:10] The pandemic lockdown began in March 2020 and Tom compares it to a terrible accident or falling off a cliff. There was tremendous uncertainty. In March, 25 percent of businesses said the impact could be catastrophic. In June, only 13 percent said it would be catastrophic.

[5:39] In March, 76 percent of businesses said that the single biggest issue for them was uncertainty. In June, that number went down to 66 percent.

[6:38] In June, operational continuity is still a big concern. The second and third concerns were managing employees and managing customers. They wondered how to get customers back and how to work with them either virtually or in person.

[7:51] A new survey question in June was whether companies asked for a PPP loan, a bank loan, or others. 25% of the companies surveyed had received a PPP loan. Others had applied for but not yet received it. 11% each were drawing on an existing line of credit, getting a new bank loan, or getting an SBA loan.

[9:15] Existing financial relationships were very important. 85% of middle-market companies are private, split between family businesses, private equity investment, and sole proprietorships and partnerships and other structures. They can’t raise capital by issuing stock.

[11:04] Some companies have prospered during the pandemic, such as companies that make restaurant take-out clamshells. Most retail businesses were “clobbered,” especially hotels and restaurants. Wholesalers supplying retailers experienced a big impact. Elective healthcare stopped. Many physician offices closed.

[14:41] Manufacturing had less impact. Construction re-opened in the first or second phase of re-opening business.

[15:53] How much are you going to restructure your business and your operations?

[16:30] The three industry sectors impacted the most by COVID-19 are retail, wholesale, and healthcare. The technology sector is projecting stronger growth in the coming months than other industries. Changes are happening in how we sell and buy things and in how we communicate.

[17:41] Going into the June survey, the Center hypothesized that deals would get put on hold. They were right. They surveyed about six transitions: selling the business, merging, bringing in a major investor, making a transformative acquisition, senior leadership transition, and restructuring, whether they would be more or less likely.

[18:39] The Center for the Middle Market routinely asks about plans to make an acquisition or sell a part of their company in the next 12 months. The Center will follow up with the same companies in six or 12 months to see how these plans trend.

[19:30] The Center for the Middle Market started operating in 2011, after the financial crisis, so this pandemic is the first crisis they have surveyed. Things started to change for businesses in March with the beginning of the shutdowns.

[20:47] In June, one out of four businesses said they were less likely to make a transformative acquisition. In March, four out of 10 businesses had said they were less likely to make a transformative acquisition. That showed that businesses in June had more confidence in acquisitions than businesses had had in March.

[21:31] Private equity is sitting on a trillion dollars of “dry powder” they’ve got to put to work. As people start getting ready to sell there is pent up demand. Now might be a good time to sell for an attractive offer.

[22:15] In June, by 10 points, people surveyed said a CEO transition was more likely rather than less likely. Tom describes why this may be, but the Center is still studying the data.

[23:37] By three to one, people said in June that restructuring was more likely rather than less likely. Some restructuring may be in the form of on-shoring previously out-shored processes and supply chains.

[25:06] The way we work will go to a new ‘different.’ Some things we see, like plastic shields at the checkout; some changes will be behind the scenes. Worker safety and productivity will change. Split shifts, school two days a week, remote work, temperature checks, and other changes will come. How do you bring remote workers on board?

[27:33] Changes required in a pandemic are time-consuming and expensive. Who will pay the difference, the customer, or the investors? Will companies pay for wi-fi for remote workers?

[28:45] Universities are still deciding how to handle changes. School starts in August, but classes will be different and professors will spend less time on campus. Lectures will be remote. Labs will be in class. People will have to certify they have no temperature or symptoms before they can come onto the campus.

[30:58] In March, 39 percent of the companies surveyed said they would be back at full capacity within a month. Nineteen percent of the companies said it would take six months or longer to be back at full capacity. In June, only 23 percent said they would be at full capacity within a month and 40 percent said it would take six months or longer.

[32:17] In March, people thought business would come back like turning on a light switch; now it’s more like a cloudy January dawn — slow.

[33:22] The Center asked companies to grade themselves A to F. Companies that were more prepared with ready capital, investment for the long-term, a three-to-five-year strategic plan, ability to keep talent, and strong marketing and communications, were less likely to say the pandemic had a big impact and they projected a faster recovery.

[34:39] Companies with those five strengths have a strong foundation for a well-operating company, even in times of crisis. Other strengths were not as critical. These lesser strengths were operational excellence and efficiency. Marketing and sales capability mattered more than salesforce efficiency. Ants outperform grasshoppers.

[36:28] Patricia looks forward to more reports from the National Center for the Middle Market. You can reach them at Middlemarketcenter.org.

[37:02] Patricia thanks Tom Stewart for being on the podcast — This is Capitalism.

Mentioned in This Episode:

Stephens.com

Thomas A. Stewart on LinkedIn

Fisher College of Business at the Ohio State University

MiddleMarketCenter.org

SBA PPP Loans