Pacific Mercantile Bancorp : How Middle-Market Businesses Survive and Thrive During Challenging Times

There's little doubt COVID-19 impacts most lives. It's played a role in the operations of organizations, altered the economy, and created political unrest around the world. What's happening to the middle-market business, one that's hitting $10 million to $1 billion in annual revenue? This sector of the economy is sometimes overlooked, but it is a critical component to the national economy as a whole.

Don't overlook the middle-market's value - it comprises a full third of the private sector GDP (enough to be the fifth largest in the world if it was its own country). Yet, unlike other sectors of the economy, this area hasn't received the same support, funding, or capital others have.

That's a key reason that some experts believe many will shutter their doors or face catastrophic damage. The statistics are there - National Center for The Middle Market (NCMM) conducted a survey in December 2020 showing an average revenue decline of 1.2 percent over the prior 12 months and a drop in employment by 2.2 percent. Companies are struggling with loss and the implications of what that loss could mean long term.

That's not to say that larger companies haven't lost - in fact, they typically have lost more in both employment loss and revenue drop during the pandemic. The difference is, in part, these smaller companies have less room for long-term financial downturns and recovery takes more time (and money that's not as readily available to them as it is to larger, more noticeable companies). More so, this sector has consistently grown and developed at a faster rate than most S&P 500 companies. That growth is critical to the country's overall ability to sustain long-term recovery in recessionary times and supports a large number of employment positions.

The middle-market is a powerful growth engine for the U.S. While it is important to support big business and publicly traded companies, it's essential not to overlook this area that's grown faster and more promising than any other component. It's also added the largest number of jobs, according to NCMM data.
That data shows:

• Average revenue growth of 6.5 percent from 2012 to 2019 compared to 3.5 percent by large businesses
• Employment growth of 4.3 percent during the same time - compared to 2.3 percent in large businesses
• Their average age is 31 years - these are not fly-by-night companies, but rather enduring brands.

It's evident - this middle-market sector is vital. Yet, in data completed by the NCMM surveys, CEOs and executives of middle-market companies are struggling right now thanks to the pandemic. The report found the following outlooks among middle-market business executives moving forward:

• 35 percent plan to delay planned investments
• 32 percent expect to experience shortages of raw materials and supply
• 31 percent anticipate a disruption due to remote workers
• 52 percent are in the office or shop right now
• 25 percent expect to have to lay off employees
• Just one-third of companies will see positive employment growth in the coming six months

What's Behind a Depressing Model Like This?

Even as the country edges closer to a recovery thanks in part to vaccines and dropping hospitalization figures, there's still key concerns for middle-market companies that cannot simply 'go away' as the virus backs down.

One of the most consistent problems companies in this sector have had is remaining engaged with and connected with consumers. When the pandemic froze the economy in March of 2020, employee safety was prioritized over everything else. While that may have been the right decision, it created uncertainty for many companies who, even as they try to reopen, must convince customers it's safe to do so and for employees to return to positions.

Yet, the companies that are thriving are the ones that altered their operations and created new opportunities for engagement as customer touchpoints - from tradeshows to meetings - came to a halt in many industries. Companies that took the time to create online-based or otherwise interactive customer connections were the ones that managed to pull through.

In a recent article by Harvard Business Review, the authors state, 'Industry differences aside, we can identify several other common characteristics for businesses that have performed well in this challenging environment. They tend to have strengths in the following areas: access to capital, marketing and communications capability, a long-term growth strategy, and an appetite for investing in future growth. These capabilities have allowed for expansion despite the pandemic - in many cases, greater than 10% growth in both year-over-year revenues and employment.'

That's no small accomplishment in trying times. Yet, the companies that took additional steps above and beyond what would be considered expected, are those that are thriving.

Another core component of success for these organizations are those that had a strong capital provider or a good relationship with their bank. Obviously, financial support and flexibility are critical at this stage of the pandemic, but there is significantly more these financial institutions can offer.

Specifically, banks have some of the most significant experience working with middle-market companies. They are there to provide funding support, but also to provide an advisory role to companies. They can aid in making better financial decisions in areas of planning and investment.

With the intensity and growing apprehension in the economy right now, middle-market companies need to focus on the basics - profitable growth and cash flow. They need insight into how to use the funds they have in the most effective and efficient manner to ensure they don't see a drop in valuation.

Yet, that does not necessarily mean no longer investing. Organizations in this sector cannot afford to take time off from investment building and growth strategies. They need to find more data and insights to enable them to make better decisions, leading to better outcomes.

A tool like Horizon Analytics can help with that. This customized financial modeling tool provides middle-market companies with more insight and confidence in their decision making. It doesn't limit growth or put the brakes on investments, but provides a brighter light to guide those decisions.

Horizon Analytics is working to help middle-market companies not just survive through this challenging time, but to recover and thrive, enabling them to continue to build and churn to keep the U.S. economy going and their enterprise value as high as possible.

How? Horizon Analytics gives companies the ability to:

• Access competitive advantages, strengths, and weaknesses. This knowledge enables improved decision making from a data-perspective.
• Determine the critical performance indicators that drive the best financial performance and deliver the highest possible company valuation.
• Find the key variables companies can control to draw in and reduce stress and risk where it is not beneficial - overcoming the 'what if' situations.
• Change impactful variables to find the best possible path to profitable growth for the organization.
• Create a 5-year forecast using macro-economic trends with industry-specific elements.

The pandemic will fade over time. During that time, middle-market companies have to find their way. If they pull back, stop expansion, and limit their movements because of revenue loss or reduced profitability, they lose long term, too.

Rather, the middle-market can overcome the pandemic's challenges by making better, improved decisions about where they should invest or how they can shave off waste to minimize losses. The key obstacle to doing this is a lack of visibility. Without a business forecasting model like Horizon Analytics, that provides full-picture oversight, companies may struggle to find their way forward. They may make decisions that cost them employees or allow customers to not give them the support they need right now.

Middle-market companies can remain resistant through the pandemic's downturn if they:

• Reimagine how to connect with customers and clients to provide a better level of service more fitting to the pandemic's restrictions
• Gain insight into their biggest financial risks and develop strategies to pull back in those areas
• Create a business forecast model that reflects the current economic conditions
• Form and maintain solid relationships with their business banking partners to shore up problems but also fund growth
• Develop appropriate operating and financial targets that allow for the best business value through the hardest points of the downturn
• Use their competitive advantages and strengths to remain top-of-mind and profitable

The right resources and tools can enable this. At Pacific Mercantile Bank, we're providing access to Horizon Analytics today. Set up a no-cost Horizon Analytics financial model and evaluation with our team today. When you do, you'll gain actionable information that drives your business forward with no risk and numerous opportunities for success.

To learn more about our Horizon Analytics methodology and hear from our Clients how they've found it to be a true difference-maker, click here