Having steadily expanded offshore to better access low-cost talent, lower middle-market companies have increasingly discovered yet another reason to expand internationally: top-line growth. MME recently caught up with Brian Hughes, national leader of KPMG’s middle-market practice, and asked him how the growing appetite for global growth is likely to reshape lower-middle-market companies. Here’s what KPMG’s “Man in the Middle” told us.
MME: It would seem that some of the fastest-growing firms in the lower middle market have made international business a priority. What is influencing this?
Hughes: I think there’s little question that those companies residing in the lower middle market are among the fastest-growing companies. This is where we first see the emerging companies
— such as the plethora of technology companies that we have routinely seen climb upward here in the U.S. They have very quickly gone from $10 million to $50 million to $200 million, and when you consider the types of products and offerings that they are developing, they pretty much have worldwide applicability, so from day one it was no longer just the U.S. market. I think we’re clearly seeing these companies influence the appetite among middle-market firms for doing business around the world. If you look at the BRIC countries (Brazil, Russia, India, and China), they are looking to import some of these same technologies that are being developed here. They are obviously growing economies, and when you think of these technologies, they help to improve efficiency and the flow of information, so they are helping to advance growth around the world.
MME: If you’re a lower-middle-market firm and you’re not dedicating resources to international growth, are you putting your company at risk?
Hughes: Well, I think of it as being like a stock portfolio. If you are all domestic, you have more of a risk in terms of executing against your business plan. The economic decline in the U.S. allowed many businesses to see that despite what the U.S. was experiencing, there was still an opportunity internationally to enjoy top-line revenue growth — in other words, in other parts of the world that were still experiencing growth. I think that a lot of companies have already realized the benefits of a balanced portfolio when it comes to serving customers in different parts of the world. We’ve also observed that whereas in the past international expansion was about outsourcing functions and lowering costs, the downturn allowed middle-market businesses to view international expansion as a means of revenue growth. This is clearly where we see the focus now.
MME: Is the fact that it’s easier to expand virtually, without brick-and-mortar expense, propelling more middle-market businesses to expand internationally?
Hughes: This really depends on the type of company. Some of the leading-edge companies can be more virtual with their approach to expansion, and they can set up with minimal investment and generate revenue, but they do still need to have presence because one thing we know is that culturally, countries like to know that companies are local. Even though they may be from another country, they like it when they have physical presence.
MME: What are some initial considerations for lower-middle-market companies that are interested in expanding beyond U.S. borders?
Hughes: Usually, it starts with going into a market that you know or feel comfortable with. For American companies, Canada as well as Mexico are strong trading partners. The other market that we have a strong trading pattern with is Europe – and once a company gets comfortable with an overseas market, it starts to build up a presence in neighboring markets. Expansion into Mexico leads to South America, and expansion in Europe leads to Africa and India. But it’s all a matter of comfort because you have to think of the challenges associated with international expansion — economic conditions, government regulation, tax issues, and repatriating money back to the States. Then there is the whole cultural difference. Doing business in Japan and China is lot different from doing business in the U.S. and Canada. And there are the HR and labor issues. In France, for instance, once you have hired an employee for more than 1 year, the ability to fire that employee becomes very expensive, so you have to start with a pretty good due diligence plan to understand the country-specific issues.
MME: How does a leader of a middle-market company contribute to his or her firm’s global expansion success?
Hughes: Well, leadership drives accountability and investments, and without this, you are not going to get a company focused on taking advantage of the overseas markets. The key is this leadership focusing and aligning the company’s resources accordingly to take advantage of these opportunities. More middle-market business leaders are really recognizing that to grow their top line, there are alternatives to the U.S. It’s now about balancing the portfolio.