Middle Market Transformation

Middle Market Transformation

“Change, when it comes, cracks everything open.”

Dorothy Allison, Bastard Out of Carolina

Middle Market in Flux

The successful design and execution of a middle market business transformation poses unique challenges for company leadership. In good times, when the cost of a strategic change initiative can most readily be afforded, and the risk most easily managed, there often seems to be no need, and hence little urgency on the part of company leadership. But in challenging times the cost and associated risks of business transformation can seem to be insurmountable obstacles, and company leadership may feel intense pressure to defer action for another month/quarter/year while performance steadily declines, rather than make the leap.

Leadership in the middle market is challenging in any time, but the middle market leaders of today must become quick studies in the key tenets of business transformation as they seek to make adjustments commensurate with the external changes facing them. Change has come to the business world in 2020, vast in scale and scope and breathtaking in its speed. It remains to be seen how many businesses will be equal to the challenge, but it is a certainty that some businesses will fail.

The most potent enemy of middle market business transformation is not fear, risk aversion, lack of strategic clarity, or the leadership challenge of implementing change. Rather, for middle market companies the most potent enemy of business transformation is the failure to recognize that change has come, and that the only viable strategy for a company is to meet external change with internal change.

While change itself is a constant, 2020 has been a year of profound and wrenching change for organizations everywhere. In the U.S. and elsewhere, the combination of governmental restrictions and a radical shift in the internal risk calculus of consumers has eviscerated the business models of companies across a broad swath of the economy. Sectors such as airlines, hotels, event planners, restaurants, bars, movie theatres, playhouses, retailers, commercial real estate, and more, all now face a radically altered outlook from that of only a few months ago. Companies in each of these sectors, and many others, are now confronted with the grim specter of a new status quo that is inimical to their viability.

A natural and understandable reaction to the massive economic shock that the coronavirus pandemic and protection measures meant to address it have imposed on businesses is to hope for a deus ex machina. Something that will provide deliverance from the life and death struggle that the leadership teams of millions of organizations now find themselves engaged in. If only we could return to the halcyon days of 2019, if only this legislative relief would be extended, or changed, if only…

Hope is not a strategy.

It is a worthwhile thing to hope, and if your conscience leads you there, to pray, for change. But the role of company leadership is to calmly assess the challenges of the moment, objectively weigh the known and unknown risks, and design and implement a plan to win in the current environment.

The world has changed, and across the middle market survival and ultimate market success will go to those companies that recognize our current moment as one crying out for business transformation, and act accordingly.

A New Paradigm

In a recent research report: “Handicapping the Paths for Pandemic Recovery”, Moody’s Analytics notes the following:

  • Global GDP is forecast to see a peak to trough decline of 10%.
  • Unlike prior global downturns, there is not currently any country that appears well-positioned as a catalyst for global recovery.
  • Fiscal support by the U.S. government has already totaled 14% of GDP.
  • Moody’s projects a non-negligible risk of a double-dip recession in the U.S. if fiscal support is withdrawn too early.

If anything, the view from a U.S. middle market perspective is even worse. The “2nd Quarter 2020 Economic Outlook Survey”, released by AICPA, was full of sobering statistics that illustrate just how dire the outlook has become for the leadership teams at middle market companies:

  • 92% of respondents indicated that the pandemic has had a negative impact on their business.
  • 81% of companies have made downward revisions to their financial forecasts.
  • Nearly 50% of companies across all size ranges surveyed (<$10MM, $10MM – $100MM, $100MM – $1B, and >$1B) expect some contraction in their business over the next twelve months.
  • 25% of companies report having an excess of employees (versus 7% in Q1).

Middle Market Change

The greatest danger in the middle market today is that leadership teams will continue to labor under the old assumptions, disregarding mounting evidence that we are living through a paradigm shifting event. The world has changed. Economic activity has experienced a drastic decline, and the path out of that decline is unlikely to be the V-shaped recovery we all pine for. To assume that the strategic landscape for any middle market company will be unchanged by this crisis is naïve.

Absent knowledge of when a vaccine or effective treatment for COVID-19 will be broadly available, we are all nothing more than amateur economists choosing to assume a can opener as a way to keep opining, abiding by an unspoken agreement that we will not grapple head-on with the gaping hole in our own logic.

We simply do not know when this will end.

But the world will look different when it does.

Strategy is your own bespoke plan to win. What is your plan to win the environment as it will be, not as it was?

Competitive Landscape

Formerly struggling giants are collapsing into bankruptcy (JCPenney, Neiman Marcus, J. Crew), and a far larger number of middle market companies will pursue restructuring as an option (whether in or out of court) as well.

Companies are going out of business. Now. Business bankruptcies in the United States rose 48% in April. A broader measure of distress (one that might encompass businesses that shut down but did not file for bankruptcy, those in the process of pursuing bankruptcy-like solutions such as an Assignment for the Benefit of Creditors, as well as those being pressured into an out-of-court restructuring by their lenders) would undoubtedly show an even more profound increase.

According to Moody’s Analytics: “Of the 8 million business establishments operating prior to the crisis in the U.S., it would not be surprising if close to a million do not make it.”

Post pandemic, every company will be faced with an altered, and in some cases radically altered, competitive landscape.

Multinational Business Transformation

A crisis often provides the necessary external catalyst for leadership to acknowledge the need for business transformation. Unfortunately, even in the face of the current crisis many companies, particularly those in the middle market, are thinking too small in terms of the changes they are considering.

The reaction by many of the largest companies in the U.S. to the current crisis is instructive. To a large extent, these companies and their leadership teams have discerned a need to fundamentally rethink key aspects of their business. The business transformation efforts of these companies to date have signaled the breadth of the change that they view as necessary. By attacking their cost structures, bolstering their liquidity positions, reassessing their channels for customer interaction, and reviewing their talent management policies, some of the largest and wealthiest companies in the U.S. have signaled unambiguously that they view the current moment as one that requires business transformation on an ambitious scale.

A sample of companies and their business transformation efforts in the face of the coronavirus pandemic will illustrate the point:

  • Gap. The clothing retailer has been hard-hit by the pandemic. Management has reported that 90% of stores globally were closed starting March 19, leading to a 61% year over year decline in same store sales, partially offset by an aggregate 13% YoY increase in ecommerce sales. In May the company announced a private placement of debt facilities and amendment of the terms to its revolving line of credit. Gap is also in the midst of resetting its cost structure by engaging in contentious negotiations with its landlords.


  • Starbucks. The company that brought coffee culture to the United States is clearly less sanguine about our prospects for a rapid economic recovery, and it is acting accordingly. Leadership is accelerating rollout of the “Starbucks Pickup” store format, originally projected to take five years, and now slated for completion in 18 months. The company closed on a debt financing in May aimed at improving liquidity and has negotiated a relaxation of certain debt covenants with existing lenders. Additionally, Starbucks has contacted landlords for its corporate owned stores and is pursuing aggressive rental concessions.


  • Facebook. CEO Mark Zuckerberg has announced an intention to transition as many of 50% of roles to remote work in the next five to ten years. The challenges of rolling out this policy are considerable, especially as Facebook has stated that it intends to maintain a pay differential by location, which may be less defensible in a remote work environment.

Transformation in the Middle Market

The challenges of the moment are profound, and for middle market companies seeking to navigate a path through the global pandemic the energy involved in imaging a radical shift in business while simultaneously working to ensure viability on a day-to-day basis can seem too much. But such is leadership in the middle market. This is the moment for companies and their leadership teams to take bold action, move forward with aggressive business transformation initiatives and position themselves to not only survive the immediate crisis but also secure for themselves a prosperous future. The host of unknows facing us all is no excuse for inaction. When the history of the pandemic is written, this moment will be recognized as one that offered extreme value creation opportunities for those leaders bold enough to take action.

Middle market companies are not smaller versions of larger companies. Rather, they are sui generis, and should be viewed as such. Nonetheless, no middle market leadership team can afford to regard with complacency the signals from economic forecasts and multinational companies that indicate adjustment to a post COVID-19 world will require business transformation on an epic scale.

Effective business transformation requires not only a plan, but a mindset oriented toward change. Leadership teams in the middle market should look to answer the following questions about their own companies:

  1. What are the key assumptions about our business that we believed to be enduring at the start of 2020?
  2. Have recent events undercut our confidence in any of those assumptions?
  3. Are our current sources of competitive advantage stronger or weaker now than they were at the beginning of the year?
  4. How secure are our finances? Profitability, cash flow, liquidity? If we needed to raise capital quickly, do we have a sense of how much capital would be available, on what terms, and from whom?
  5. Is our company positioned to be an acquirer if a major competitor fails?
  6. How strong are our relationships with key stakeholders? Is there more that we can do to bolster these relationships?

The exercise of answering these questions, with a self-critical lens, will help middle market leadership teams identify areas of weakness to be addressed in a business transformation initiative.


We are in the midst of a period of undeniable economic and social change, and the impact of these changes will reverberate for years to come. Business models will be upended. Competitive dynamics will shift. This is a moment for forward-looking leadership teams to set their companies on an upward trajectory of value creation. But for those who do not act, history offers a bitter lesson: change is inevitable, and failure, no matter how remote the prospect is in our own minds, is always a possibility.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.