Thinking about expanding internationally? Four common misconceptions every business owner should know the truth about

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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.

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Equiteq’s Global Consulting M&A Report – A geographical overview

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Our Global Consulting M&A Report explores every aspect of M&As in the consulting sector. This week we’re taking a closer look at how different parts of the world compare.

North America

Globally, consulting activity reached a nine-year high in 2014, with an increase of 21%. As the largest market for consulting M&A, North America’s ongoing economic improvements are affecting this trend.

Looking at the North American market, 93% of acquisitions took place in the United States and 7% in Canada. After a sluggish 2010-2013 period, the US economy gained momentum and demonstrated strong economic growth in 2014. Well performing equity and credit markets, increased consumer confidence, low borrowing costs and companies’ high cash reserves positively affected M&A activity in the region.

Europe

In 2014, European M&A volumes increased by 7.4%, despite year on year deal volume declines since 2011. Despite this, deal value trends are rising for European consulting firms.

The optimism about Europe’s growth was being challenged by Russia’s military intervention in Ukraine and Europe’s sanctions against Russia, as well as an increasing threat of deflation in the western countries. In 2014, M&A activity was driven by the three largest European M&A markets: the United Kingdom (43%), France (14%) and Germany (11%). The strong economic performance in the UK was reflected by an 8.9% increase in the deal activity compared to 2013. The largest percentage increase in M&A activity was recorded by France, a 47.4% jump over 2013. The number of German transactions climbed by 25.7% from 66 deals in 2013 to 83 in 2014. From the next top seven countries, only the Netherlands saw an increase in deal activity when comparing 2013 to 2014.

Asia Pacific

After a steep period of growth in deal volumes from 2009 to 2011, Asia Pacific consulting deals have stabilized at approximately 300 deals per year. The effect of slowing growth in China was balanced by strong activity in the Australian market.

The region’s two largest M&A markets, Australia and China, grew by 9% and 5% respectively in 2014. The strengthened deal activity in Australia is a result of strong demand, improved confidence and stabilized valuations. And as competition has been increasing in China, we have seen rising consolidation in the domestic economy.

On the other hand, Japan and India slowed down in 2014. Stagnant economic growth and demographic problems continue to hinder Japanese deal activity, with a 13% drop compared to 2013. And a stringent regulatory environment and depreciating rupee has led to 4% fewer transactions in India.

Africa and the Middle East

In 2014, consulting deals in Africa and the Middle East were up 74% compared to the lowest point in 2010. They were just 12% shy of the nine year high in 2007. However, uncertainty across many regions cast doubt on the sustainability of the upward trends in deal volumes and values.

The region is a relatively small proportion of the global M&A consulting market, with an average of 2.3% of total deals a year. It is being driven by South Africa, with 45% of total deals.

South America

After a sharp drop in 2013, the deal volumes started to recover with a 19% increase in 2014. A slowing Brazilian economy is likely to have a negative effect on M&A in the region going forward.

Strong growth in Brazil was the main driver in the region’s recovery. On average, 51% of total yearly deals take place in Brazil, this rose to 65% in 2014. In Brazil the number of deals increased by 42% from 26 in 2013 to 37 in 2014.

If you’re interested in a more detailed analysis on any of these areas, more information can be found in our full report. To download a copy you need to be a member of Equiteq Edge – registration takes only moments here.