How an international office expansion may risk equity value

International Expansion Blog Photo Cropped

Expanding your consultancy business and opening new offices abroad can seem an attractive proposition, however, it’s advisable to proceed with extreme caution. It’s important to consider the significant equity value and financial instability associated with such a move. If your consultancy is smaller than $10m, a failed international expansion can be catastrophic or make your business unsellable. While there are several sound strategic reasons for expanding overseas, those looking to grow value and realize equity must consider an overseas expansion through this lens.

There are often two assumed benefits made by consultancy owners when thinking about expanding overseas:

  1. The business will grow faster by selling current services into a new market
  2. The consultancy’s M&A position and attractiveness to strategy buyers or investors will improve, or at least not be impaired by such a move

The first point suggests that the business will grow faster and be more profitable, but is this true and is the timing right? The business owners may sense that the business has hit a growth ceiling in the home market, or the business is experiencing sufficient demand in other markets, but when digging deeper this is often not the case.

For instance, has the business really reached a glass ceiling or is it flat lining because there isn’t a disciplined approach to client acquisition? Or is the current sales and marketing process simply inadequate to drive growth?

If you are attracting prospective clients across borders, then consider the distraction; the cash flow commitment of setting up shop to cater to new markets is significant. To lessen these risks, make sure that the business is making enough profit in these markets before committing to a move.

The second assumption – that moving abroad will attract greater M&A demand and a higher equity value – is by no means certain. Buyers in the consulting M&A market acquire for a wide range of strategic reasons. Yet most buyers will focus on acquiring consultancies with deep domain expertise and intellectual property that can be leveraged (see our Buyers Research Report). Tight geographic focus is a key factor, but not necessarily a deal breaker either; top tier buyers, those with the deepest pockets, already have an international footprint and might not see the value in a consultancy that is spreading itself across borders.

This doesn’t mean that SME firms cannot be attractive or valuable if they are international. There may be a buyer out there for whom you are a perfect fit. However, it is generally true that the buying market will be more limited.

So, think very carefully about the risks of opening up an office in a new country for business growth and development purposes. SME consulting firms operating out of multiple countries will appeal to a more limited acquisition market than those with niche capability in a single growth market.

It’s important to consider the implications of international expansion against your M&A market positioning, in conjunction with your value growth plans and target time to sell.

If you’d like to read more about the equity value risks in international office expansion, please read the full article here.

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