5 things every consulting firm must know to thrive in Asia-Pacific

Equiteq’s CEO, David Jorgenson, and Jean-Louis Michelet met with Professor Kevyn Yong (Dean of ESSEC Asia-Pacific and specialist of entrepreneurship) at ESSEC Business School in Singapore to discuss the opportunities and challenges impacting M&A activities in the Asia-Pacific region.

This is the third part of their discussion: What advice would you give to consulting firm owners in one of the Asia-Pacific countries?

The consultancy landscape in Asia-Pacific has changed in the last few years. There has been a strong development in the use of consultants as the regional economies have grown and become less dependent on the primary sector, and have seen a surge in secondary and services sectors activities.

A 2016 report from the United Nations Economic and Social Commission for Asia and the Pacific shows the increased activity in the services sector is partly down to its role in facilitating global value chains in the manufacturing sector. It also attributes this to the growth of digital-intensive services in sectors like financial services, telecommunications and digital media and marketing.

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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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How an international office expansion may risk equity value

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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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