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Middleman: Meaning, Examples, Functions, Importance

By
Adam Hayes
Full Bio

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Updated September 16, 2024
Reviewed by
Somer Anderson
Somer G. Anderson Somer G. Anderson
Reviewed by Somer Anderson
Full Bio
​Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas.
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Businessman and businesswoman signing contracts with intermediary in between the two groups Businessman and businesswoman signing contracts with intermediary in between the two groups

Getty Images / fizkes

What Is a Middleman?

A middleman is a person or business that serves as an intermediary in a business or financial transaction or a supply chain. Brokers, agents, distributors, and wholesalers are all examples of middlemen.

Key Takeaways

  • A middleman is an intermediary, or a go-between, in a transaction or a supply chain.
  • The role of the middleman is to match buyers and sellers and facilitate the transaction between them.
  • In return for their services, middlemen will typically earn a fee or commission, which may be paid by the seller or the buyer.
  • Many industries and business sectors use middlemen in one form or another.
  • "Cutting out the middleman" as a way to save money is possible in some situations but impossible in others.
  • The rise of the internet has made direct sales, without any middleman, more common.

How Middlemen Work

Middlemen can be individuals, small companies, or large corporations with an international presence. The role of a middleman, or intermediary, is to facilitate interaction between parties, such as a buyer and a seller, typically in return for a commission or other form of fee that may be paid by the buyer, the seller, or both. In some transactions, the parties will attempt to "cut out the middleman" by dealing directly with each other in order to avoid that added cost, although that is not always possible or even legal.

Middlemen can also make money by purchasing a product and then reselling it for more than they paid for it. This difference is called the "markup."

A typical supply chain in business may involve multiple middlemen, such as a distributor who buys raw materials to resell to a manufacturer or buys finished goods from a manufacturer to resell to a retailer.

Salespeople are often considered middlemen, such as real estate brokers and agents who match home buyers with sellers and facilitate the transaction between them in return for a commission that's usually based on the sale price.

In certain industries, middlemen are all but unavoidable. For example, automobile makers typically do not sell directly to consumers. Instead, their vehicles are sold through licensed dealers. The same is generally true for electronics, appliances, and other retail products. In some cases, manufacturers will have a say in how the middleman can market, advertise, or price the product and may offer them various incentives to increase sales.

Stockbrokers are another common example of middlemen. While it is sometimes possible to buy shares of stock directly from the corporation that issued them, it is more common for investors to go through a broker, who will make the purchase on their behalf in return for a commission. In addition to handling the transaction, the broker may also provide advice to the client, such as whether the stock is a good buy or whether there may be better alternatives. In the case of mutual funds, investors often have an option to buy the very same funds either directly from the mutual fund company (known as no-load funds) or through a stockbroker or financial adviser (known as load funds). In the latter case, the load, or sales charge, is paid by the buyer to compensate the broker or adviser for their services.

In many fields, such as real estate and financial services, middlemen are also subject to federal and/or state laws governing their behavior. In some cases they must also have passed certain tests and obtained the appropriate licenses to do business.

The rise of e-commerce has changed the dynamics of where an intermediary fits in some types of transactions, often making it easier to cut out the middleman altogether.

Middleman Laws Example

In certain states, the sale of alcoholic beverages may be structured to require retailers, bars, and restaurants to purchase products through a liquor distributor. Under such laws, a winery cannot sell its products directly to retailers, thus making a middleman essential. This can limit the availability of their products as they are beholden to the distributors who control the channels they can pass their wine through.

Such constraints may also extend to the sale and shipment of their products from one state to another. Some states allow the sale and shipment of products such as wine directly to the consumer through online purchases, thus eliminating the layers of middlemen, while other states prohibit this practice. This has proven to be a contentious issue for the distribution segment of the industry, which traditionally relied on wine and spirits makers being required to ship their wares through them.

What Is Disintermediation?

Disintermediation is a fancy term for cutting out the middleman, or removing an intermediary from a transaction where one might otherwise be involved. An everyday example would be a traveler who purchases their plane tickets and books their hotel stays directly from those providers rather than going through a travel agency.

What Are the Advantages of a Middleman?

In many instances, the added cost of going through a middleman is more than made up for by the time and cost savings involved. A store owner who stocks products from hundreds of different manufacturers, for example, will find it far easier to buy them through a wholesaler that has relationships with those companies than to deal with each company individually. The store owner might also benefit from the economies of scale that a wholesaler brings to the transaction, since it may be purchasing large quantities of any given item for resale to the many stores it serves.

What Is a Distribution Channel in Business?

A distribution channel refers to the links in the supply chain leading from a manufacturer to the ultimate consumer of the product. It might include wholesalers, distributors, warehousing, shipping, and other functions, as well as the retailer who sells the product. In a direct distribution channel, the manufacturer sells its product directly to the end consumer. In an indirect distribution channel, any number of intermediaries may be involved in the process.

What Is a Jobber?

In the retail world, a jobber is another name for a wholesaler, often a small one.

What Is Vertical Integration?

Vertical integration is a business strategy in which a company takes over multiple segments of its supply chain and eliminates those middlemen. The company might be motivated by potential cost savings or a desire to assume greater control over the process and eliminate possible disruptions in its supply chain. For example, a manufacturer might acquire a company to supply its raw materials or one that can make the component parts it would otherwise have to purchase.

The Bottom Line

Middlemen play a key role in many business and financial transactions. While the rise of the internet, with its ability to directly connect buyers and sellers, has lessened their power in some instances, they remain an important force, especially where their involvement in transactions is legally mandated.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. National Association of Realtors. "Licensing for Real Estate Professionals."

  2. FINRA. "Registered Financial Professionals."

  3. Wine Institute. "Direct-to-Consumer Shipping Laws for Wineries."