A problem of size

It’s tough being a mid-sized business (MSB). 

Too big to take advantage of government handouts and business breaks, and too small to have the influence and power of global giants, MSBs could be forgiven for developing an inferiority complex.

Many MSBs receive little support in an increasingly competitive, regulated and technology-focused world. No wonder some experts refer to MSBs as the “forgotten army”.

In 2018, these businesses find themselves sandwiched between the increasing dominance of global giants and a new wave of small, fast-growing digital disruptors.

With a few notable exceptions, such as China, where the mid-market has been booming, and Germany, where the mid-market has greater government support, MSBs are under pressure to compete, both domestically and internationally.

What is a mid-market business?

Definitions vary depending on the country and region. Some authorities measure revenues. Others measure asset size or number of employees.

In the US, mid-market generally refers to a business with annual revenue between $100 million and $3 billion although Dun & Bradstreet’s proprietary database defines the mid category as those businesses with annual revenue between $10 million and $1 billion.

In Europe, the definition of mid-market varies significantly. Mid-sized businesses are viewed as larger in the UK and Germany (£15m to £800m), for example, but smaller in France and Italy.

Lack of support

You would think things might get easier when a small enterprise grows into multimillion-dollar business. Not so, according to independent reports by global technology company Ricoh, the International Federation of Accountants (IFAC), and international accounting firm Mazars.

In a report on the European mid-market titled ‘Middle Child Syndrome’, David Mills, Ricoh Europe CEO, says: “The disappointing truth is that, in many European countries, mid-sized businesses don’t get the support they require from stakeholders such as governments and regulators (one exception to this is Germany, which has done extremely well in encouraging its Mittelstand businesses). They often get overlooked in comparison to small businesses and multinationals. Yet the mid-market is responsible for 30% of the revenues that are generated by European business.”

The German exception

The German Mittelstand, which refers to both small and medium-sized businesses as well as family-run or owned operations, is a case apart. Employing the majority of Germany’s workforce, these firms often choose a speciality and become very good at it before exploiting international markets. They benefit from access to finance through the MSB-orientated savings bank association and especially through the KfW Development Bank, which has the ability to fix borrowing costs over long periods. Typically, they also have low debt ratios.

Steffen Ahrens, Partner at German accountants FALK, a participant firm in Praxity Global Alliance, says: “The owner of a typical Mittelstand is long-term orientated and thinks in generations rather than in quarterlies. Their profits are generally reinvested and not distributed.”

Commenting on the Mittelstand’s success internationally, the FALK Partner says: “After the BASEL II and III bank regulations German MSBs worked even more towards a better equity ratio as it simplified access to external financing tremendously.”

He adds: “With the German economic situation for MSBs said to be at an all-time high, it is no wonder that financing foreign investments and adding additional capacity is less a problem here than elsewhere in Europe. However, as the German industry is highly dependent on exports, the recent possibility of future trade barriers will be a challenge even for the Mittelstand.”

What are the challenges worldwide?

IFAC claims that, globally, the biggest issues for small and medium-sized entities are economic uncertainty, rising costs, difficulties accessing finance, keeping up with new technology, and compliance.

There are also behavioural issues, with Ricoh claiming that MSBs typically “lack the formal structure, governance, processes and even the underlying mindset to take themselves to the next level of growth”. In addition, the technology specialist cites resource and structural issues making it difficult for MSBs to thrive, especially the regulatory burden and an inability to unlock access to finance.

Globally, MSBs face multiple challenges when trying to expand internationally, according to Praxity participant firm Mazars. The international accounting firm says the mid-market faces “numerous hurdles” which “brings an element of reluctance for them to explore international markets”.

The five main hurdles to international expansion are:

  • taking advantage of technology
  • facing legal and tax issues
  • sustaining growth
  • meeting logistics challenges
  • partnering with local firms

What can be done?

To help both small and MSBs overcome these challenges, Mazars has produced a series of reports as part of its Venturing Abroad program which encourage businesses to take advantage of the “tremendous potential” of expansion into new territories.

Mazars is leading by example. Itself a mid-sized firm (€1.52bn annual revenue in 2017), Mazars has strengthened its international presence by belonging to Praxity, the world’s largest alliance of independent accounting firms. Membership enables Mazars to share knowledge and expertise with other accounting firms around the globe to aid international growth and to provide a seamless service for clients expanding into new territories.

In 2018, investing in technology is likely to be the biggest dilemma facing MSBs as they face up to the threat of being left behind by the smart technology of start-ups and the sophisticated, all-encompassing systems of multinationals.

Technology is key

Investing in new technology could help MSBs overcome resource issues and drive down costs long-term but it is seen by some as complex and hugely expensive to implement. One answer could be to adopt more scalable IT solutions via service providers rather than implementing an entire system single-handedly.

Neil Relph, Managing Partner at UK-based Praxity participant firm Rouse Partners, says investing in technology could help MSBs gain leading edge. “Technology is a key area where mid-market businesses can thrive. More agile than their larger counterparts, but with more resources at their disposal than smaller businesses, leveraging technology could be the real ‘ace up their sleeves’. From an operational perspective; internal efficiencies, employee satisfaction and HR functions can be optimised using new tools and apps, whilst analytics can enable data-driven decision making.”

He adds: “Investments in areas such as cloud solutions, AI and automation can augment or redefine how they add value for customers and gain a competitive advantage in their marketplace. I would advocate that alongside these developments in technology, robust management controls are established over processes and systems to remove inefficiencies and aid productivity.”

Changes start with government

Governments and policy-makers also have an important role to play. There is a tendency to lump small and medium or mid-sized businesses together when developing policy, and to overlook the unique challenges facing the mid-market.

Then there is the matter of regulation. “Too many MSBs feel they are trying to abide by rules designed for multinationals, while only having the resources of a small company. That’s holding back investment, innovation and energy that could be channelled towards growth,” Ricoh consultants claim. The way forward, they say, lies in a raft of measures to create a more even playing field:

1. Lighter regulation

2. More accessible finance

3. Help with attracting the right talent, including closer ties with universities

4. Help with identifying, funding and deploying the right technology

Partnerships with universities is one of the factors believed to be behind the success of the German model. An example is the Fraunhofer-Gesellschaft, the leading organisation for applied research in Europe, which has 72 institutes and research units across Germany and is part-funded by the state.

One of the biggest stumbling blocks for MSBs may be accessing finance, especially in the US. Lenders to US mid-sized businesses are increasingly concerned about the higher levels of debt held by middle market companies versus a year ago, Reuters claims in a report in January 2018. There are also concerns over what are considered to be less restrictive leveraged loan documents.

With little movement in easing the regulatory burden, it would appear that exploring new ways to tap into talent and technology, and developing new partnerships on a domestic and international scale, will be the best routes for MSBs to compete in 2018.

How Praxity firms are helping MSBs 

Praxity, the world’s largest alliance of independent accounting firms, and itself a mid-market organisation, is at the centre of moves to help MSBs deal with the unique challenges they currently face. This help comes in the form of sharing expertise across international borders.

Rob Wagner, Managing Partner, Tax Consulting Services, at US-based Praxity participant firm BKD, says MSBs “generally need hand-holding” as they don’t have extensive resources inside their company to deal with all the regulatory compliance issue. He adds: “They really benefit and appreciate the fact that, through Praxity, there are firms and organisations on the ground in other parts of the world that will do that kind of hand-holding to help them until such time as they grow big enough to add their own finance teams.”

Steffen Ahrens at FALK in Germany says membership of Praxity means FALK can assist MSBs by providing advice both at global and local level. “With Praxity we have access to a thriving alliance and dedicated talent in almost every corner of the world.” He adds: “We at FALK are successful not only by being able to follow our clients abroad, but by leading them there, assuring them that they are in the trusted hands of our fellow Praxity colleagues.”

Similarly, Chris Schmidt, CEO, of Moss Adams in the US, says: “The value of being a member of Praxity for a client is really multi-faceted. Being in the west of the US, we have many, many clients who are importing and exporting; they’re establishing operations in Asia Pacific, Europe, South America, and the Praxity association allows us to help these clients with all of their technical issues. The association has been very valuable to us as a firm as we grow with our clients.”

One of the main benefits of sharing global expertise is the capability it offers, according to Lindsay Holloway, Managing Director of William Buck in Australia. “Differentiation in a mature crowded market is one of the most difficult things,” he says, but Praxity membership enables firms like William Buck to “have the capability of large firms” from a differentiation perspective.

This article was written for Praxity, the world’s largest alliance of independent accounting firms.