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Greenville Business Magazine

The Upstate's Mighty Middle Market

Oct 04, 2018 04:01PM ● By Emily Stevenson
Partnered Content Provided by Upstate SC Alliance

For South Carolina’s Upstate, continued economic success isn’t just a matter of growing by leaps and bounds.

“The biggest strides our region takes in terms of growth aren’t due to the largest or highest-profile companies,” says David Jones, tax partner at GreerWalker.

“There are, deservedly, headlines when a massive, well-known firm comes to the Upstate. What we don’t hear as much about, however, is the long-term growth driven by middle-market companies expanding and succeeding right under our noses.”

While definitions vary, the term “middle market” typically describes a company earning between $10 and $500 million in annual revenue. Middle-market firms have distinct set of needs and challenges that sets them apart from large corporations or smaller enterprises; falling in the middle provides agility for quick growth, but fewer resources to support a business on the rise.

The Upstate’s future is being shaped by mid-sized companies. From January through July 2018, according to Upstate SC Alliance data, 25 economic development projects announced plans to invest in the region, with expected capital investment of $585 million and more than 1,400 jobs to be created. Fourteen of those projects were expansions, says Jones, a member of Upstate SC Alliance’s Global Competitiveness Council Steering Committee and leader of its Middle Market Outreach (MMO) group.

“This underscores the value of incentivizing growth for our region’s mid-sized companies. South Carolina has stepped up its ability to pull these businesses in and support their expansions by providing incentives that the middle market, not just the biggest names in business, can receive,” he adds.

According to the Brookings Institution, the middle market represents 3 percent of all American companies, and its companies generate 60 percent of job growth and one-third of private employment and private GDP. During the Great Recession, when larger companies struggled to stay afloat, middle-market firms saw growth.

“The agility and confidence required to succeed when flagship firms are struggling should be celebrated,” Jones adds.

The trend didn’t end when America’s economy began to recover. Post-recession, firms in this category are outpacing larger companies both in revenue and employment growth. According to the 2017 Middle Market Power Index from American Express, the number of mid-sized firms nearly doubled between 2011 and 2017, and the number of jobs they provided more than doubled.

“Middle-market companies are often invisible drivers of regional economies, ours included,” says Upstate SC Alliance President and CEO John Lummus. “They’re more than incubators for big business. These companies are integral players in global supply chains, they’re often privately owned, and the jobs they provide are critical for sustained economic growth.”

Reinvention by Acquisition
Take Greenville’s Confluence Outdoor for example. Founded in 1977 as Perception Kayaks, the watersports company has grown from a start-up manufacturer to an industry leader with an umbrella of 10 brands sold across the globe.

Still, says Vice President of Marketing Todd King, worldwide success does not exclude a mid-sized firm from challenges.

“Landing squarely within the middle-market segment means you’re not a huge company with the accompanying resources,” King says. “But you’re not as agile, quick, or risk-taking, necessarily, as a five-person operation. So how do you act entrepreneurially while maintaining the structure and processes required to grow?”

Confluence’s strategy has been to “diversify, acquire, and expand,”  King adds. “We aligned eight new brands, most of whom had previously competed, within our own. We had to be skilled marketers, manufacturers, designers, and engineers to make all of this work, to reinvent ourselves.”  

After decades in Pickens County, Confluence considered a move to North Carolina to meet increasing demand with a larger facility. “Thankfully, we found a spot in Greenville,” King says, explaining that for the first time Confluence has its administrative, manufacturing, and design teams all under one roof.

With fewer layers of management, a more nimble operational structure and narrower access to necessary capital, middle-market firms are uniquely positioned with both great potential and substantial hurdles to achieving success. This conundrum is one that the Upstate SC Alliance, along with the region’s business community, hopes to help its booming middle market tackle.

Middle Market, Big Challenges
For this economic segment to thrive, says Lummus, companies must overcome a phalanx of challenges distinctive to their size.

“Middle-market firms may have the potential of a larger business, but the capacity and resources of a small one,” he explains. “We see the same specific needs arise across market sectors.”

Enter the Upstate SC Alliance’s investor-led Global Competitiveness Council. A collaborative, investor-led initiative rooted in the Brookings Institution’s Global Cities Initiative, the Council works to connect Upstate companies with inspiring business ideas and resources needed to implement them.

Middle-market companies are at the core of the Council’s work, and the Alliance has introduced an event series that explores key challenges and opportunities in business growth. Calling on local legal and accounting expertise, past events have focused on tax reform, growth through exports to foreign markets, understanding the European Union General Data Protection Regulation (GDPR), and leveraging intellectual property through patents. 

Navigating Policy and Regulation
As mid-sized companies grow, the impact of tax reform and changing regulatory and legal environments can become magnified.

“Big companies with sizable lobbying staffs may be able to tolerate policies that can cause substantial damage to middle-market firms,” explains Jones.

Earlier this year, the Upstate SC Alliance and GreerWalker partnered to host middle-market companies for a presentation and panel discussion of the monumental 2017 federal tax code overhaul.

Most notable in that conversation was the transformation of the method by which American companies trading abroad are taxed on their revenue. The new hybrid territorial tax system allows a U.S. firm to pay the tax wherever they are trading, then bring that income back to the States tax-free. That specific change may inspire mid-sized firms to pursue business abroad more than ever before.  
These ideas were the cornerstone of this summer’s Grow Your Business Through Global Connections event, where Marek Gootman, Brookings Institution fellow and director of strategic partnerships, reflected on the middle market and opportunities for growth.

Sixty percent of middle-market businesses have never sought to export or trade internationally, Gootman says. He adds that the top 10 percent of middle-market companies outperform their larger-sized cohorts, and that gap only widens for firms actively exporting.

It’s easy to see why middle-market companies would seek to bring their businesses abroad, says Gootman, but this growth potential is often overshadowed by the accompanying legal, regulatory, and logistical challenges.

Ed Flanary, founder of American Foam and Fabric, explains that his company experienced “a steep learning curve” when it began to export. The company started in only 10,000 square-feet of space and today has 47 employees at an office in Greer and a 400,000 square-foot distribution facility in Lyman.

“Ironing out sourcing, quality, and resources on the ground was a process that took time,” he says of his company’s first few years pursuing international markets. “But I’ve worn out two passports in 10 years, because I believe you tend to be successful in what you focus on. Exporting has driven remarkable growth for our business, so we network, ask questions, find the answers we need, and keep our focus there.”

Before exporting, Flanary’s business required an influx of capital to grow domestically. “The business community in the Upstate has been a critical and supportive part of our success, from the professional service providers we deal with to the banks we’ve had the pleasure of working with,” he says, “but in our early days we had to pursue financing from friends and family. That’s how you get started when you have nowhere else to go.”

Accessing capital at the right time in a company’s growth is another major barrier for many middle-market firms. “Taking on outside investment can allow mid-sized companies to fuel their growth strategically, pursue new ventures, and expand in current and new markets,” explains Jones, “but finding that financing can be a challenge.”

Talent & Culture Challenges
Another primary challenge for mid-sized companies is talent acquisition, development, and retention — and marrying these ideas to think about longer-term succession planning.

“You need the right people in your company to grow,” Jones says. “Whether that’s seasoned executives, skilled people on a manufacturing line, or capable administrative folks. The ability to access talent at all levels is vital, and any business owner or economic developer would agree.”

Many middle-market firms are privately owned and have a more of a “family feel” relative to larger corporations. Maintaining that culture during growth and acquiring the right candidates to suit their “rapidly growing, all-hands-on-deck” environment can be an intimidating task.

King agrees, adding that to support Confluence’s growth, the company requires “workers who are engaged and excited to come to work daily. We compete for talent against large manufacturers that have better work environments or perhaps a different benefits structure.”

The question of how to compete for talent is best answered by professional service providers and other middle-market firms that have walked this path before.

“The solution could be as simple as developing a compensation plan to retain executives or adding a life insurance element for key players in a growing firm with succession questions,” Jones adds. “We draw together attorneys, tax specialists, business leaders, and economic developers to attack such questions from every angle; middle-market entrepreneurs don’t need seek these answers alone.”

None of these challenges is unique to the companies facing them, which is why the Alliance has chosen to focus on connecting Upstate companies to programs and resources of this type. As its Business Growth Series evolves in 2019, talent will also become a sharper focus.

“These firms provide a sustainable competitive advantage to the Upstate, one well worth our support,” Lummus says. “There’s nothing middling about the Upstate’s middle market.”

For more information about the Upstate SC Alliance’s Business Growth Series, visit