Awhile ago my agent broke the news that she had reached the end of the road with my middle grade manuscript. It has been rejected by all of the big New York houses and their imprints, and when I asked about smaller presses she essentially said that they weren’t worth the effort (in terms of the financial payout and level of promotion), and that I’d be better off to self-publish it. Knowing myself, I’m fairly sure that the legitimacy that even a small press would give my novel would make me much more comfortable with the self-promotion I know is necessary for a book to sell. So I don’t think the self-publishing route is right for me.
I’m considering next steps at the moment. A friend suggested I query new agents. Obviously I’d have to tell them up front that the manuscript has already been rejected by the large publishers, which it seems would make 99.9% of them reject it outright (understandably so) (1). Or, I could simply go it alone and query smaller presses that accept unagented manuscripts?(2)
I've reached this point with a couple of my clients too. It's one of the worst conversations in the world to initiate let me tell you (and it's no picnic on your side of the phone either, I know.)
You're right (1) to assume most agents aren't actively looking for a used, albeit good, manuscript. We are in business to make money and we prefer to sell to places that will give us lots of it. Finding a new agent might not be step one here.
However, you might ask your agent if she'll look at the contract if you sell it yourself to a small publisher. This is what I do for my guys who've been in this situation. (In fact, I insist on looking at every publishing contract my clients sign because I want to avoid problems down the road and some of these small publishers have contracts that make strong women weep.)
If she will, then (2) shop this puppy yourself. You clearly know you're in for a lot of promotion and marketing work, but you are with a big publisher too.
The problem with self-publishing a middle grade book is that the buyers of these books are not the readers. Parents and teachers buy the books and it's hard to get a review in Library Journal if you're not a publisher. It's REALLY hard to get your books in Barnes & Noble (where parents shop) if you're self-pubbed too.
If your agent won't help you with the contract you might consult this book for short term remedies.
For longer term remedies, this one is the place to start.