SMEs in the UK should consider partnering with businesses overseas in the same industry in a mutually beneficial arrangement
Despite the economic traumas of the past five years, there are still burgeoning opportunities for SMEs to latch on to highly lucrative ‘growth by partnership’ opportunities with other businesses in emerging markets, as evidenced by David Cameron’s recent highly publicised trade delegation to India.
One of the key initiatives of the delegation to India earlier this year was to promote and stimulate UK/India SME trade. During the mission I was involved in a series of roundtable meetings with a sub-group focused on finance and the professional services. Those meetings brought together some of the business and thought leaders from across the UK and India. One of my focuses at those meetings was to reinforce the value of growth by partnership.
The premise for growth by partnership is this: a UK-based SME wants to move to the next level but has hit a plateau in its growth. It either doesn’t have, or can’t borrow, the requisite funds required to expand under its own steam. To push through the plateau the business establishes a bilateral trading relation with another similar SME.
There were more than 30 UK SMEs represented in the PM’s delegation, reflecting the potential for them to grow their business by entering the Indian market. Growth by partnership is an efficient way to expand into the international marketplace. At its core, an SME will look to a similar SME in another country and will aim to piggyback off the business brand that the SME has already developed in its respective market.
For example, a domestic goods retailer in the UK looking to sell its products abroad will partner with another domestic goods retailer in the country they want to penetrate. Both will benefit from the arrangement. The UK business will have an instant brand ‘in country’, with minimal financial exposure and risk. The SME abroad will have an increased range of goods and greater leverage to expand its brand further. This model differs from distribution arrangements which, for some at least, can prove problematic due to a lack of direct product control, a loss in profit margins in dealing with a distributor and the complex contractual relations which can ensue.
In my professional capacity as an adviser and provider of legal services to the SME market, I have been fortunate enough to enjoy a front row seat to the changing landscape of the SME sector. I can vouch that it is innovative, dynamic and ripe with opportunities for expansion.
Post-liberalisation emerging markets such as India present enormous exporting opportunities for SMEs. These firms may understandably wrongly feel that the economies of scale in harnessing the trading benefits of an emerging market are the sole reserve of the blue chips and major corporations, but progressive companies are fast changing that outdated thinking. Growth by partnership offers an SME a portfolio of opportunities with reduced risk, without the need for otherwise prohibitive mass capital expenditure.
When establishing a partnership, it’s all about identifying the ‘right’ trading partner in the ‘right’ location and with the ‘right’ ambitions. As much as is possible, the partnership has to be a perfect marriage.
Such commercial marriages allow the business to enjoy an immediate ‘in country’ presence; an elevated trading profile and fast-track marketplace penetration; utilise already developed trade links and networks; use existing plants and / or machinery, and reduce financial exposure, thereby circumnavigating some of the inevitable ‘red tape’ that could otherwise be prohibitive to an SME.
Emerging markets have an exponentially growing middle class that is reaping the financial rewards of high growth, so the domestic luxury goods markets in these countries is almost straining with opportunities for ambitious UK SMEs. Not surprisingly, firms are looking to distant shores in their droves to seek out the benefits of trading with emerging markets, some of which offer double digit growth percentage-wise. Equally, companies situated in emerging markets have recognised that they are held back by a dearth of technological ‘know how’ and are keen to offer their cheaper production rates in return for the benefits garnered from partnering with a technologically-sophisticated western SME.
Once the SME has evaluated the foreign market that it wishes to enter and has found a partner with which to trade, it must then carefully consider what business model it adopts in its new venture. Such consideration will require a full, honest and frank evaluation of the goods and / or services, and its growth expectations. A model that has proved both popular and robust is the joint venture partnership (JV). A JV requires a regimented approach and one of the ‘deal breakers’ can be deciding the equity split between the JV partners. Overcoming this possible sticking point necessitates both partnership parties managing their expectations and being realistic about what each brings to the table. One of the key services that my team provides is finding, advising and connecting those ‘perfect partners’.
Amarjit Singh is head of the India Business Group at Dutton Gregory LLP. If you would like to talk to Amarjit about commercial partnership opportunities in Britain and India, please telephone 02380 221344 or email a.singh@duttongregory.co.uk
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