Small and medium-sized enterprises, which also include micro-enterprises, are the engine of the European Union's economy. They account for 99% of companies, create two out of every three private-sector jobs, and contribute more than half of the value added generated by the business sector, according to the European Commission.
They are a backbone of the economy, and the same holds true in Spain. As of April this year, there were 2.94 million businesses in Spain, according to the Ministry of Industry, Trade and Tourism. Of these, the universe of micro-enterprises (1–9 employees), small enterprises (10–49 employees), and medium-sized enterprises (50–249 employees) accounts for 1.33 million companies, equivalent to 45.3% of the business sector. In terms of gross domestic product (GDP), they're responsible for 65% and generate 75% of jobs.
These figures highlight the enormous range of investment opportunities among SMEs, many of which are hidden gems waiting to be discovered.
But what are the benefits of investing in an SME for an investor, whether strategic or financial (investment funds, family offices, private equity, etc.)? Here are 5 advantages.
1. Diversification
Expanding into new business lines, entering a new market, or broadening the product or service portfolio (in other words, diversifying) is one of the main arguments for a corporate move, whether by a competitor or by an institutional investor looking to strengthen the financial muscle of one of its portfolio companies. The latest report by KPMG, prepared together with CEOE, on “M&A Outlook in Spain” confirms this.
At the investment portfolio level, investing in SMEs can provide timely diversification, for example by seeking companies that are uncorrelated with the economic cycle. This way, risks are minimized.
2. Growth potential
SMEs tend to have greater growth potential than large, established companies. Because of their smaller size, small and medium-sized enterprises are more agile and flexible in adapting to changing market conditions.
In addition, they usually have plenty of room for professionalization, given that they're family businesses. In Spain, 90% of private companies fit this profile, according to the Instituto de la Empresa Familiar (IEF), Spain's family business institute. This also tends to result in less leveraged companies, given their greater conservatism.
They also tend to have a limited international presence, which offers huge opportunities to grow through expansion.
They're able to bounce back even in difficult periods. At the end of last year, Spain's Association of Registrars (Colegio de Registradores de España) presented its report Spanish Incorporated SMEs 2016–2020 and 2021 Preview, which shows how they recovered their profitability after the impact of the pandemic. In 2021, average profitability rose above 2019 levels.
3. Job creators
As mentioned at the beginning, SMEs carry the most weight in job creation in Spain in the private sector. Excluding civil servants, out of total employment last April (17.43 million), small and medium-sized enterprises with employees provided jobs for 9,506,732 people, compared with 6,323,451 at large companies. The month-on-month change shows that medium-sized and small companies contributed the most to the increase in employment.
The Sage report Small Businesses, Big Opportunities? points in the same direction. This study is carried out in many countries. Spanish SMEs have shown the greatest optimism. Not only do they see themselves as capable of creating 235,000 new jobs in 2023, but 73% are fully confident in the success of their business. The main reason given is Spanish business owners' confidence in the capabilities of their workforce, six percentage points above the global average.
4. Commitment to innovation, creativity, and sustainability
That agility and flexibility make it easier for them to innovate and develop new solutions and products. By investing in an SME, you're backing the company's ability to generate fresh ideas locally. This has a positive impact on the economy, since innovation drives a country's growth and competitiveness.
Sustainability has become a central pillar of SMEs' strategies. Sometimes out of their own conviction, but also because public authorities and customers require it. In any case, according to the Sage report, 88% plan to adopt measures to recycle and reduce waste. In this area, they're better able than large companies to adapt to new times and regulations.
5. It fosters local development
SMEs largely operate locally, and their supply chain involves other local companies and suppliers. Therefore, by investing in one of them, you're stimulating economic activity in the area. The reason is that these companies tend to buy goods and services from local suppliers, which in turn generates income and jobs in the community.
In addition, investing in an SME helps build a diversified business ecosystem, reducing dependence on a single industry or a specific company. This increases the region's economic stability and makes it less vulnerable to market fluctuations.
At Deale, we already have a universe of 1,800 companies registered on the platform that are ready to take part in a merger or acquisition, whether to diversify their business, consolidate an industry, or ensure succession.
