By Adam Blatchford, Associate, Equiteq
For many business owners, establishing a strong local presence is only the first step on their road to success. Once they’ve achieved this, they want to continue growing the value of their firms, and many are tempted by the thought of expanding geographically beyond their home markets. It is a seductive idea littered with potential pitfalls that could not only jeopardize the business’s financial position but also significantly erode equity value.
In this blog, we look at how you, as a consulting firm owner, can make smart decisions around ‘if’ and ‘how’ to scale your business abroad, to ensure you are protecting and building your company’s value rather than hindering the attractiveness of the company to future buyers.
We’ve compiled some of the most common reasons business owners give for expanding internationally, and the potential risks that those reasons might be hiding.
1. We have exhausted our home market
There is a significant opportunity cost to international expansion; while it can provide opportunities to grow, it is usually far easier to grow in your current market where you already have relationships and credentials. So it should only be attempted if you have truly saturated your market:
- Be absolutely certain that other factors are not hindering growth
i. Check that your proposition correctly resonates with your client’s issues
ii. Examine if you are competing with internal capacity
iii. Assess your account management to ensure you maximize your current clients
iv. Confirm that your sales focus is on the right type of client
If these issues are the true cause, rather than a saturated domestic market, then they will hinder your progress in the new market too.
2. A client wants me to deliver a big project; I must have an office
You do not have to open a full office just to service a client. You may hear the argument that you will not be taken seriously without a physical office, but if you have the right quality assurance and client management processes, you can still deliver a fantastic client experience from a distance. Here are other things to think through:
- Physical infrastructure is expensive, and it can tie you in for a long time
- The difficulty of hiring new staff can be compounded by cultural and language issues, but most importantly are the skill sets you require available in the labor market, or will you need to train all new staff extensively
3. I won’t have to spend much of my own time overseeing the expansion
You may be able to minimize time spent with the right team, but be realistic, some of your management time will be required. For example, if there are issues, will you be drawn in to fix them?
As you are one of the most valuable and expensive resources in your business, is this the best use of your time?
Usually, consulting firm owners need to spend less time working in the business, and more time working on it. So could your time be more valuably spent working on your proposition strategy, investing in enabling technology and IP, or maximizing sales to current clients?
4. New market surely means more revenue, and a bigger sale price
Size is important, but buyers are interested in more than just the size of the business; they pay particular attention to your profitability, IP and niche focus. You could end up building scale but lose out in other areas and actually reduce your equity value.
- Think about the strategic fit with a potential buyer, will this geography be attractive to them?
- Does this geography fit naturally with your proposition and current operations, or will it raise red flags to a buyer?
i. A multinational buyer may find it difficult to acquire a geographically spread firm because they need buy-in from so many internal people
At a more tactical level, if you are thinking about a sale within 24 months, do you have enough time to do this?
- It could depress margin in the short term, at a time when you want to be demonstrating your profitability
- Is there time for the new operation to reach a critical mass before sale? A sub-scale operation would be off-putting to most buyers
- Trying to build an international office could distract you from the important sale process, increasing the chance of it falling through
Click here to better understand what will interest future buyers
- Make sure there are the clients and resources in the new geography to support your growth, not just a single client project
- Consider your positioning to a buyer – could geographic diversification be off-putting and harm your chances of a successful future deal?
- Be mindful of the opportunity cost – should you be focusing your effort elsewhere to better build equity value and achieve your shareholder goals?
This blog is a condensed version of a more in-depth article. Click here for more pitfalls to avoid when considering international expansion.
This blog is the second part of our series on Smart Scaling. To access other content in the series please click on the following links:
Part 1: Are you scaling smart or scaling toward failure?
Part 3: IP is the pixie dust that will make your firm fly
If you are preparing to sell your consulting firm and would like to discuss your plans, please get in touch.
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