Over the past two years, our business landscape has faced one of the biggest challenges in its history. The pandemic hit hard, bringing major changes in a very short period of time. Companies in every industry were affected and have had to make great efforts to adapt to the new landscape. On top of that came the outbreak and devastating consequences of the war in Ukraine, along with runaway inflation, and everything that has meant for small and medium-sized enterprises in our country.
Within the EU, Spanish SMEs are smaller and less competitive. This makes them particularly fragile and vulnerable to changes in the financial markets.
This, combined with the difficulties they face in connecting with investors who could help bring stability and boost their growth, has left the sector seriously hit by the current economic climate.
Our platform, Deale, was created precisely to help Spanish small and medium-sized enterprises access M&A deals, a business growth strategy that until now was reserved for large corporations and, as a result, little known and rarely used among SMEs, despite its countless advantages.
Today, an average of 200 companies a month join our platform, which gives us an accurate picture of the health of SMEs across Spain, as well as the main trends and the industries with the greatest potential. Below, we briefly share our main conclusions.
Growing industries
Most of the activity of small and medium-sized enterprises in Spain takes place in the industrial, construction, retail, and services sectors. However, companies have realized that digitalization is key to continuing to drive their international expansion, as new technologies allow a small company to reach many countries with minimal investment. Innovation and digital services are another booming sector with strong growth prospects, so we expect investment in these areas to increase among SMEs.
The latest data from the Ministry of Industry, Energy and Tourism (Ministerio de Industria, Energía y Turismo) indicate that most Spanish SMEs operate in sectors that are closer to consumers. Looking at the figures, according to the latest SME statistics from the Ministry of Industry, Trade and Tourism (Ministerio de Industria, Comercio y Turismo), 73.32% operate in the services sector, 11.35% in construction, 9.44% in agriculture, and 5.89% in industry.
More off-market deals
In times of crisis and socioeconomic instability like the present, long M&A processes and deals carry a greater risk of failure, as they are more exposed to market swings. That's why off-market deals, with much shorter negotiation and approval processes and usually less competition, are seeing a significant increase. And we expect this trend to continue over the coming months.
At the same time, these deals require a much smaller investment, so both business owners and investors see them as offering a better balance of risk and reward.
More demanding due diligence
Increased volatility and the fragile situation of many businesses, precisely because of this global context of instability, are making due diligence more demanding. The goal is none other than to analyze and anticipate situations that could put the investment at risk.
Growing interest in SMEs
Our analysis also shows that large companies' interest in SMEs has grown. Large chains are closing deals to buy smaller regional companies, and this is becoming a trend.
In fact, as the ICO (Instituto de Crédito Oficial) loans granted during the pandemic have come due, economic pressure on SMEs has increased, leading many of them to see M&A deals as a way to clean up their finances and secure their survival in the medium and long term.
At the same time, the number of insolvency proceedings is expected to rise by 20% by the end of 2022 compared with the previous year, due among other factors to the recent approval of the new Insolvency Law (Ley Concursal), as well as rising inflation, which is being felt at every level and in every industry, not to mention high energy prices. In short, it is a situation that is putting many of our country's SMEs on the ropes, and M&A can be a lifeline for them.
Greater use of earn-outs
Given how complex it currently is to value a business's assets accurately during an M&A process, we expect earn-outs to increase, so that the seller in a deal can recover part of the purchase price afterward based on the activity and profits generated by the company.
For all these reasons, it's no surprise that many investors currently see great potential in the SME sector, which is eager to keep growing and needs to find new ways to drive its growth and consolidate its position in an increasingly demanding, global, and digital environment.
At Deale, we want to keep helping these companies learn about industry trends firsthand, give them the tools they need to adapt to current and future challenges, and find potential investors for their businesses. And we will keep doing so with complete transparency, offering them a digital platform unique in the industry where sellers, investors, and advisors can, for the first time, easily connect and find synergies to support one another in their growth.
