CEO Stories: NCMM – Taking the Middle Market’s Temperature During COVID-19

Thomas A. Stewart
Executive Director, National Center for the Middle Market

The National Center for the Middle Market conducted a survey of 260 mid-sized companies from March 23-25, as the full scope of the Covid-19 pandemic was becoming evident.

Non-essential businesses in many states had already been closed, with the national economy in what has been likened to a “medically induced coma.” (The full report can be found here.)

The surveyed companies, who in the fourth quarter of 2019 had expressed more optimism than they had in the previous quarter, were once again showing decreased optimism. The companies had expected top-line growth of 5.8 percent in 2020; now 78 percent expected some level of decline.

Two-thirds of companies now expect employment to shrink, and a quarter of companies believe the impact of the virus will be “catastrophic.” Companies reported the biggest negative impacts (in order) on operations, revenue, payroll, employment, supply chain, and working capital. As leaders, respondents indicated they were struggling more with the things they can’t control:  supply chain, cash and working capital, and customer experience. Close to half—44 percent—say they will restructure as a result of the pandemic.

Overall, the middle market has proven itself to be a resilient player in the economy. The survival rate of middle market companies is comparable to that of large businesses, and during the financial crisis of 2007-2009 this segment actually added jobs. With regard to sentiment about the pandemic, 80 percent of the companies surveyed expected to be running at full capacity within six months, and only 19 percent expect a downturn of seven months or more.

This Is Capitalism: Ray Hoffman with Tom Stewart, NCMM

RH: This is Capitalism. I’m Ray Hoffman. As I record this on the 11th of April 2020, what good news we see and hear is almost entirely in the context of people making extraordinarily good things happen in the face of what for most Americans living today is the worst crisis we have ever faced.

So especially now it’s good to be reminded of how at its core the U.S. economy in its essential design around the free and voluntary exchange of goods and services, including research, technology, and good ideas, is the perfect and proper vehicle for leading us out of this. And so, it is extremely valuable to have new research to not only show how the coronavirus is affecting business but also to show how business people already are looking toward the day when this is all behind us.

The survey was conducted by the National Center for the Middle Market at Ohio State, or as they’ll say when football finally returns, THE Ohio State University. To establish a benchmark, it’s worth a look back at the surveys it conducted in late summer and fall of 2019. And, in this socially distant Zoom conversation with the National Center’s Director, Tom Stewart, this was my first question.

Was the optimism you were seeing in late 2019 unbridled or guarded?
TS: Great question, Ray. The optimism was guarded. We do this survey every quarter: 1,000 companies, revenues between $10 million and a billion dollars a year. In the third quarter we saw a sudden drop in confidence, in projected sales, your 12-month sales and sales—in all the numbers that we saw, the third quarter was a drop. And we had seen some sort of slightly funky signs of just sort of flattening the top of this very long expansion for a few quarters, but this was like “uh oh, is this a wakeup call or is this just a blip?”

When we came to the fourth quarter, those numbers bopped back up. Confidence bopped back up, growth projections and growth bopped back up. But there was a trend line that showed a certain amount of diminished, slowing rates of growth. So, if you looked at companies’ projected growth rates over the last five quarters they were dropping from a pretty high level but they were lower than they were before.

Same thing goes for the number of companies that said that they would be reducing their work force. So just to give you some actual numbers, if you go back for the eight quarters starting with the first quarter of 2017 there was a big blip, a high mark that we saw, but projected confidence numbers dropped from 90 percent in the U.S. economy, dropped from 90 percent to 83 percent in the fourth quarter of last year. And then that plunged to 60 percent right at the end of March with the impact of the pandemic.

Similarly, you saw a projected growth rate in revenue, projected revenue growth rates, dribbled down from 5.9 percent in the fourth quarter of 2019 to 4.9 percent in the fourth quarter of 2020. So, they drifted down. And the number of companies that said that they might be reducing their workforce in that same period from the fourth quarter of ’18 to the fourth quarter of ‘19, that slid up from 7 percent to 10 percent.

So, there was a little bit of softness, I mean, still growth but it was growth that was less robust than what we had seen in the eight or twelve quarters before as this long expansion was at its peak.

RH: And then since I know you’re connecting at all times with people in the middle market, when did you start hearing the anecdotal evidence of something more in the wind?
TS: Oh well, at the same time everybody saw something else. I mean as the pandemic started showing up. I mean, my personal experience, I commute back and forth between Columbus, Ohio, where the National Center for the Middle Market is, and New York, where I live. And I was already starting to see somewhat less full planes I think as part of this still strong growth but somewhat softening growth. But then in the middle of March the planes were empty, basically, as we were all told to stay home, or the first two weeks in March.

(I’m on 96th and we’ve got sirens coming by, probably going toward Mt. Sinai or toward Metropolitan Hospital. So pardon me. Realistic sound effects of what we’re in the middle of. That’s sort of the music, the sick music that comes by my window all the time.)

But we started seeing it at the same time as everybody else. So, what happened is that we commissioned a survey. We went out into the field to get 260 mid-sized companies responding to a pulse that we took March 23rd to March 25th. We were already seeing businesses, unessential businesses, being closed. You know commerce is in what Paul Krugman calls a medically induced coma.

RH: Yeah, and March 23 in fact was the day of the market bottom, or at least the market bottom thus far.
TS: I hadn’t noticed that. Of course, most of these companies are private so the stock market is not directly an impact but you’re right. So, we’re out there on March 23rd. And we asked a bunch of questions of some of the same people who had answered that December survey. So, this is 260 people of the 1,000 who answered it in December who we got back to and said, “let’s ask you some specific questions”

And just to give you an example: That group of companies told us in December that they expected that they would grow 5.8 percent on the top line in the coming 12 months. Now four out of five of them, 78 percent, have said growth will decline. They didn’t tell us how much; they probably don’t know. Those same 260 companies, they expected their workforces would grow 3.2 percent, that’s before corona. Two-thirds, 64 percent, say employment will shrink. Twenty-five percent said that they believed that the impact of the virus would be catastrophic for their business.

RH: Twenty-five percent?
TS: Eighty-one percent said that there would be an impact on payroll, 84 percent on revenue, business operations, disruptions—basically you see it across the board, really significant declines.

RH: And looking at the middle market, I know this isn’t an absolutely appropriate measure given the fact that so many of the companies are private, but the S&P 400 mid-cap index fell 40 percent during that period from February 19 to March 23 when the large-cap S&P 500 was down 34 percent. So, can we suggest that relative underperformance is a good metaphor for how the companies in the middle market are more exposed to a situation like this?
TS: I don’t know the answer to that question. It’s a great question. One thing that might be true is they might be more quickly exposed. Whether that exposure is deeper or not, I don’t know. They might also have a question of how much access to capital they have in the short run and though these S&P 400 companies are all in the public markets, I think there is that sort of a question about whether you’re going to be able…about access to capital that we’re seeing throughout the middle market. Obviously, cash is one of the major challenges that companies are seeing.

But you know, Ray, I wonder about this: We have data from the 2007-2009 financial crisis and you see some really interesting things when you look at that. We have data to look that’s small business, mid-sized business, and large business. And one question is survival rates. How many just die or get sold off for parts? And small business takes the biggest hit on that.

The middle market survival rate is pretty comparable to that of large business. It’s a little worse but, you know, large business a little more likely not to completely fold up its tents than the middle market but the middle market has pretty strong resilience.

But what was really interesting is that during that period between 2007 and 2009 surviving middle market companies actually added jobs, which was like, “huh?” And part of my feeling about that is maybe because many of them are private and don’t have to answer to a Wall Street analyst’s earnings expectations they’re just trying to say “let’s do what’s right for the business” and for some of them it might be expansion.

Whether we will see that now, I don’t know…whether we will see the resilience of the middle market in response to this shock. All shocks are different, right? One of the questions we asked in this pulse check was “how quickly do you think you’ll be able to get back to business at full capacity?” bearing in mind the capacity may be less; full capacity may have a different definition. And 13 percent said immediately, 26 percent said within a month, so add that up, that is 40 percent, 39 percent that say they would be up and running at full capacity within a month, and 80 percent said they’d be up and running within six months.

RH: Yeah, only 19 percent expected a downturn lasting seven months or more, which stunned me.
TS: Yeah. Or the ability to return to full capacity. As I said, full capacity might be less. But how long before you’re back on your feet doing the best you can, right, firing on however many cylinders you’ve got? And that was a surprising number to me.

Again, it’s a survey taken at the end of March. It’s one of two things: It’s a survey either taken at the high point of “I don’t know what is going on here”—the high point of confusion and uncertainty, or the bottom point. Right? And we’re going to go back and ask these same questions in June and this is what I’m going to watch: will more people express confidence in their resilience, or will that line move to the right and more people say it will take a little longer than I thought?

We asked how big is the impact going to be and we gave them “catastrophic,” “serious,” “manageable.” And actually there are a few people who said the impact would be positive. I guess they’re making personal protective equipment or maybe in some sort of area…. You know, Zoom is a middle market company, speaking of stock market, Zoom’s stock has zoomed in the first quarter of this year.

So, the 25 percent who say catastrophic, we didn’t ask them to define catastrophic. You know? It could mean I’m going to sell the business; it could mean we are never going to get these three months back or four months back or however it might be.

I imagine some retailers and restaurants might feel catastrophic. There are a lot of middle market companies who are franchisees for McDonald’s and Sonics and things like that; may have a couple dozen McDonald’s or Sonics stores. So, I imagine for those guys it’s…they’re just closed and that’s just wiped off, forget about it. You know? First half of 2020 didn’t exist.

RH: And the biggest challenge that you’ve found was supply chain disruptions followed by finding cash and working capital.
TS: Yeah there are two issues here, they’re interesting. Because we asked one question: “Where is the biggest impact?” And the biggest negative impact was on operations, revenue, payroll, employment, supply chain, and working capital in that order. But the second question we asked was “Where are you struggling the most as a leader?”—the stuff that you can’t control. And there we saw supply chain, cash and working capital, customer experience, operations. Those were the worst.

And what is striking to me is people are saying “my operations”…87 percent say my operations are disrupted, but only 15 percent say that we are not at all or not very affected in dealing with this. Supply chain, almost twice as many—27 percent. Almost twice as many say “I’m not very effective at managing that.” Why is that? I guess it’s partly my operations are within my four walls. It’s messed up but at least I have the levers in my hands and I can do something about it. My supply chain is to my left and to my right, it’s upstream and downstream, it’s all messed up, and I don’t know what to do.

RH: Beyond those four walls.
TS: Yeah. I can’t control it; I’m having a hard time communicating or working with these people because they are messed up too. And so the effectiveness of doing that is an issue. Cash and working capital, likewise. There is no cash coming in for many of these businesses. If I had the cash, I’d know what to do but where am I going to get it? That’s out of my control. I’ve got to go to the bank, I’ve got to go to some other sources, I’ve got to see what I can do to cut my costs.

The bright spot is that people think their IT—and including their ability to work remotely—they think they’re doing a pretty good job of that.

RH: Yeah, only 9 percent reported any new problems with IT, which obviously speaks to a great technological breakthrough which allows us to look optimistically at this entire situation.
TS: You know, you sort of wonder. The first time I saw an email address on a business card was in 1992, 28 years ago. So imagine this had happened 28 years ago, the internet is basically in its infancy, it’s all dial up, if it’s that. It’s green phosphor on black screens. We’d have been less dependent upon it, of course, but our ability to communicate would be so much less.

So I think that the IT industry as a whole can say “you know what, we’ve got something that is taking the strain pretty well.” I mean the strain on capacity that’s holding itself up is pretty robust. It’s a bright spot in a dark world.

RH: Yeah, it goes back to that word you use frequently in this report: resilience. And I notice that even the sales expectations collapsed 46 percentage points from the December survey. This survey of yours shows demand for these companies’ goods and services only, in quotes, down 25 percent. So what does that comparatively smaller number say about resilience or at least how the middle market views resilience?
TS: My reading of this is—and by the way, there is a third number—which is business climate and people’s perception of the business climate also was down, quote/unquote, only 9 percent. So what it tells me is people are saying I can’t sell anything but demand hasn’t disappeared. Obviously demand for some things has disappeared but demand—demand for a new car, demand for a new refrigerator, demand for a new roof on my house—I can’t fulfill that demand right now but the underlying demand has shrunk less than my sales.

So when business comes back or starts oozing back, it’s not going to be a light switch, but when it starts growing back there will be residual demand. Some of it gone forever; but a lot of it still there.

And then likewise this feeling that the overall underlying business climate, as of the end of March, people feel has not been damaged to a grievous degree. Right now, I can’t sell anything but as things come back, if I can get my business back going, if I can get customers back in the door the second half of the fourth quarter or whatever it’s going to be, is going to be okay.

RH: And you also were looking at corporate strategies and how companies will look forward in a strategic sense.
TS: Some of these data are on our website, which is, but what I’m about to tell you is not. We also looked at transitions. We asked questions about “do you think you’re more likely or less likely or no difference in selling the business, merging with another company, bringing in a major investor, making a transformative acquisition, transition in senior leadership, or restructuring.” So we asked about those six things.

And there are a couple of things that are interesting. There are a few things that are less likely. Making a transformative acquisition: basically a significant number say it’s less likely. And I think the overall number is like 80 percent say it’s either got no impact or less likely. So, these companies are saying “I’m not going to make a transition, a major a transformative acquisition, or I’m less likely to. I’m less likely to bring in a major investor. I’m less likely to merge with another and I’m less likely to sell the business.”

Senior leadership transition: more likely. Half of them say no impact but of the remainder about two-thirds say…so that’s 35 percent…say that they are more likely to have a senior leadership transition. And that just may be, “God, I’m 65, I don’t want to do this again, let me pass the business on, or…” But it’s more than you’d see in the normal course of business.

Forty-four percent said they were more likely to restructure. And only like 20 percent said that they were less likely to restructure. So the biggest single impact are people are saying “yeah, we’re going to get back to business but you know what, we’re going to restructure” and that may be a lot more remote work, it may be 20 percent fewer workers, it may be getting rid of a couple of divisions or lines of business, it may be digitalizing all kinds of stuff that was less digital.

I don’t know what the details of that restructuring are but 44 percent are saying we’re going to take out a clean sheet of paper and the business that’s going to emerge from this is going to look different from the business that went into it.

RH: Now this survey was taken March 23 through 25, the Federal Stimulus Bill was signed March 27, which is certainly a plus, a big plus, but of course the country is not shut down. So, I’m wondering, two weeks after your survey, as we record this, has the anecdotal evidence that you have gathered in conversations since the survey was taken changed your opinion about anything that you found in the survey?
TS: Not really. One of the things that I have heard is that a whole lot of organizations, investment banks, people at the Association for Corporate Growth, bankers, accountants, lawyers, they are all… There’s one group of them that’s down on K Street trying to hold their begging bowl in front of the federal government but there is another group that has really been trying to say “here is how you can navigate.”

And you see a whole lot of people assembling resources for “how do you get SBA loans, what is the PPP part, which allows you to get some subsidies for keeping people employed, how does that work, how do I go through it?”. There’s a whole lot of organization trying to say this is how you navigate and get access to the things that were already available or that are now available under the CARES Act.

I have no idea. The biggest impact, one of the the biggest problem is total uncertainty—“I don’t know.” I suspect that in that 51 percent of people there are a group of people who are saying “At least I’m starting to get some advice now. I may still not know what the direction is but I am beginning to get some advice about how to do things.”

So what I’m hearing is there is a little more clarity about the tools that are available to me. There is not a lot more clarity about the job I need to do with those tools, where the business is going to be in three months or six months, where the virus is going to be in three months or six months, but at least there is a little more clarity about some of the tools.

RH: And one last question: What is it within our economic system and within the makeup of the people that you talk to routinely, these mid-sized firms, that 60 percent of the people you have surveyed are still feeling confident about the  U.S. economy and about their local economy?
TS: Well, two things there. First of all, that’s who are expressing any level of confidence, right? So it’s from extremely confident to somewhat confident. That number is a relatively low number. It’s not as bad as I feared it might be. We saw numbers like that in 2013.

And the middle market generally is more confident in the local economy—69 percent say they’ve got some confidence in the local economy, that’s the economy they know. These are guys who are pillars of a community, this is the streets I walk down, the people I know, the neighbors I employ and sell to. They have a stronger sense of the local economy.

I think there are two things. This fundamental underlying belief that the U.S. economy is flexible and that investment and performance go to places where there is an opportunity for return. So you’re not locked into something rigid, you can change, you can evolve, and you have the capabilities of doing that.

I think a second thing is that built into the U.S. economy and all its richness and diversity are a lot of intermediaries, a lot of advisors that can help you. There is some really interesting work that was done a few years ago by some people at Harvard Business School looking at some of the obstacles to growth in emerging markets. And one of the things that they found is your ability to get access to intermediaries who might be 3PL logistics providers or they might be advertising agencies or law firms or all the various business services that you call on.

The absence of such intermediaries slows down growth. The presence of such intermediaries allows you to call on them, allows you to leverage assets that you don’t own. If I can use a 3PL, I don’t need a fleet of trucks. It reduces the capital intensity of business.

So, I think these two things—one, flexibility, and two, a network of intermediary services that allow me to grow with less capital intensity than if I had to roll my own. I think those two things help create an environment where people say once things get back I’ll be able to get back to work with some level of confidence that I can call on these resources and pull stuff together and get my business going.

RH: You can take it from Tom Stewart whose organization’s website is When at least we’re ready, there will be reason for optimism and plenty of it. This is capitalism. I’m Ray Hoffman.

About the Series: Featured stories from the intersection of the free market and entrepreneurial success. Here we speak with leading CEOs, academics, philanthropists and up and comers on their contributions and perspectives on the American economy.

About Ray Hoffman: Ray Hoffman, a veteran business journalist, is highly-regarded for his news and analysis features and insightful CEO interviews. Representing BusinessWeek on air for twenty-one years, Mr. Hoffman was the morning business news voice on the ABC Radio Networks from 1995 to 2006. Mr. Hoffman also represented The Wall Street Journal, on air, for eleven years. His daily WCBS CEO Radio feature was recognized by the New York Press Club as best radio business news report in both 2012 and 2015. In this podcast, Mr. Hoffman invites some of America’s most dynamic CEOs to share their stories as business builders and perspectives on free enterprise.