This end of the market has much transactional potential, and to play a role, law firms need to determine the definition of an SME
By way of a response to the crisis, there has been a great deal of focus on how the transactional activity of small and medium-sized enterprises (SMEs) form a key part of private sector growth, says João Caiado Guerreiro, Managing Partner of Caiado Guerreiro. “But for law firms in Portugal, this means determining exactly what constitutes a SME these days and what they need, in order to play a relevant role.”
A smaller scale
The average SME in Portugal falls under the category of ‘micro-enterprises’ and is mainly family-run, consisting of just a few people, says Caiado Guerreiro. “Most of these SMEs conduct business on a much more informal basis, and only carry out formal transactional activity if influenced by strong external factors, such as banking debts or the bank having to sell off the company.”
Furthermore, the smaller the business, the more likely the type of agreement is motivated by the commercialisation of goods and services, rather than by making significant acquisitions.
The big SME transactions, therefore, are mainly confined to the higher-end of the mid-market, says Caiado Guerreiro. “Larger SMEs often call us when there are succession matters, the sale of the business to another mid-size player – sometimes foreign – or because they want to acquire a business in Portugal or abroad.” And they are also involved in some restructuring that is being prompted by the crisis.
This increased activity is not entirely surprising,he explains, as many of these businesses are in fact multinationals operating as mid-size SMEs.
However, it is the other kind of SME that falls in the higher-end bracket that is providing law firms with a broad range of opportunities.
These businesses are already professional and familiar with the M&A world, and operate in much the same way as a listed company, using all the formal documents such as letters of intent, says Caiado Guerreiro.
“And while influential and able to insist on policy reforms, they are not bound by the rules of the regulators and still attract financial investment.”
The problem is that these types of SMEs, by falling somewhere in between, face challenges that are distinctly different from both the micro-enterprises and large firms.
“That is not to say they are not still crucial to economic recovery,” he explains, “they just don’t necessarily have the right support, nor do they have the in-house corporate resources to support transactional processes”.
But it is this kind of SME that law firms are focusing on, because not only is there an ever-increasing volume of significant transactions, but by not having extensive resources at their disposal, they require law firms to adopt a new way of working – one that Caiado Guerreiro says requires them to have a more hands-on corporate role.
“While we do the usual kind of work, they value our advice in all sorts of business areas, whether they are looking to sell their business, change their structure or maximise their budget,” says Caiado Guerreiro. “For us this means that becoming an integral part of the overall set-up.”
Defining the deal
Therefore, as the definition of a SME is relative, deals shouldn’t be classified according to the size of the company but on the size of the deal itself, says Caiado Guerreiro.
“Often we represent multinationals divesting of all or part of their activity in Portugal and selling to an SME, or alternatively buying the SME,” he explains, “and we see this a lot more often than, for example, an SME merging with another one.”
However, that is not to say that law firms aren’t still interested in the transactional activity happening at the lower end of the SME spectrum, he says.
There is potential there, and where there is potential there is still opportunity.