SIZE MATTERS AND REMAINS OUR UNFINISHED BUSINESS
For as long as I can remember, and it’s been over 30 years, I have heard, read, and analyzed countless reports, recommendations, and business support programs, all pointing out the small size of Spanish companies compared to those in our surrounding countries and the harmful effects this has on the competitiveness of our business fabric.
Recently, Funcas published a new article on its blog confirming this fact and emphasizing that the problem for SMEs in Spain is not just a matter of size. And it probably isn’t, as there are many other issues SMEs face. However, the fact that 30 years later we still have a business structure with SMEs that are much smaller than the European average and far behind the size of companies in Central Europe is something that should concern us in terms of competitiveness.
A business fabric made up of small companies that does not converge with the structure, in terms of size, of its neighboring countries is, in the long run, a weak business fabric with fewer capabilities to face future challenges.
A small company has strategic limitations that make it more vulnerable during periods of crisis and hinder its growth and financing.
Among other challenges, small companies:
- Have less resilience to crises and a higher mortality rate.
- Their capacity for innovation and investment in R&D&I is limited.
- They face greater difficulties in internationalization and exporting.
- Their ability to obtain financial resources is lower, often relying on their partners.
- They have less ability to attract talent and face challenges in retaining it.
- In this regard, the analysis of business mortality between 2007 and 2013 conducted by CEPYME in its study of the growth of Spanish companies is quite significant. Summarizing the conclusions of that analysis: the number of companies with 10 to 49 employees decreased by 33% during this period, while those with more than 500 employees decreased by 23%. Additionally, the business recovery rate was also significantly different: by 2021, companies with over 500 employees had recovered 100% of their 2007 numbers, whereas companies with 10 to 49 employees were still only at 83% of their 2007 levels.And if we are all aware of this weakness, and there are many organizations, foundations, and business experts disseminating and trying to drive change in our SME structure, why, after so many years, have we not managed to adapt our business structure to match the size of our neighbors?
My conclusion, after 20 years dedicated to Mergers and Acquisitions and having had many conversations with hundreds of business owners, is that it is a cultural issue within the country’s business community. Although I can see it changing in recent years, it remains deeply rooted in the DNA of many entrepreneurs.
One of the pillars of business growth, in addition to organic development, is inorganic growth: an acquisition, merger, or business integration that brings growth, synergies, better positioning with clients and suppliers, additional resources for R&D and internationalization, among many other benefits. However, the traditional business owner has typically been wary of any association, integration, or merger with a competitor or complementary company. Moreover, socially, the perception of selling a company or merging with a third party has had a somewhat negative connotation, which has not facilitated these types of processes.
Today, I observe a certain change in these attitudes, a greater openness to bringing in partners, sharing the business project even if the original shareholders end up in the minority, and a business culture that values growth and the contributions that other companies or partners can bring to the common business project.
An important contribution to this change has been made by Venture Capital or Private Equity, which, after many years battling against these mental barriers in the business world, has demonstrated—through significant success stories—how a partnership between an entrepreneur and a financier, later incorporating other companies through acquisitions or mergers, results in a much more solid, profitable, and attractive business project for all involved, significantly increasing the size of the companies they invest in and actively contributing to the growth of the average size of Spanish SMEs.
Moreover, the entrepreneurship ecosystem, start-ups, and technology-based companies developed in the country in recent years, with a much more Anglo-Saxon business approach focused on growth, funding rounds, and project sharing among various types of partners, has generated a new class of entrepreneurs much more inclined towards business growth and shared projects. This, in turn, is increasingly helping to drive SMEs towards greater size.
Although each time we update the picture, we continue to see that gap between the size of our SMEs and that of our European neighbors, I believe we are evolving towards a more dynamic SME structure, focused on growth and aware of the challenges and the need for company size to tackle the strategic, technological, and market challenges they face. All this leads me to trust that, little by little, this picture will evolve towards a structure with SMEs of a size closer to the European average, with the benefits this brings in terms of competitiveness, survival, and added value.
