5 min read
SME Meaning: Putting Small and Medium Enterprises (SMEs) in Room 101
‘Room 101’ is where we put things that we find torturous. The term comes from George Orwell’s famous novel ‘1984’ and, more recently, the great British TV programme.
‘So, are you suggesting we put 99% of the UK’s businesses in Room 101?’ I hear you say. Running SMEs is hard work and those that do are to be admired as wealth creators and employers.
Nevertheless, the SME definition is torturous – it is defunct, out-of-date and useless – so let me explain why.
The Flawed SME Definition
SME as a term is widely used and for many, it simply means ‘owner-driven businesses’ or ‘businesses run by entrepreneurs’. For the UK, as well as the EU, the term is divided into three categories:
- Micro-business = less than 10 employees and turnover under EUR 2 million
- Small business = less than 50 employees and turnover under EUR 10 million
- Medium-sized business = less than 250 employees and turnover under EUR 50 million
In the UK, as of 2020, 4,225,204 businesses can be defined as SME with the majority falling within the ‘micro’ business category (*Data Source – D&B Hoovers). This number is impressive, but in the virtual age, the definition is total nonsense and gets in the way of scale-up strategies.
One of our highly successful clients employs only three people and outsources everything. As a training business, it has high-profit margins in the 70% range and would be in the FastTrack 100, but it cannot apply as they do not have enough employees.
At the other end of the scale, a cleaning agency business we worked with has 600 employees and a £12 million turnover, yet very low margins. They were classified as a ‘medium-sized’ business, yet their profits, whilst respectable, were less than 5%.
A micro business with a ‘secret sauce’ and £3 million crowdfunding may be pre-revenue, yet far more capable of scaling up than a ‘steady eddy’ medium-sized business which has been established for 30 years.
Why Does it Matter That the SME Definition Is Flawed?
Banks bundle their clients into this definition and the Government, with whatever little advisory support it offers, follows. This means that owners cannot accurately benchmark where they are in the business cycle.
Advisers that can help micro-businesses, which most still refer to as small, really are not the best to help the larger small and medium-sized businesses as the challenges, potential and aspirations are fundamentally different.
At Avondale, we think the SME meaning is something different, and, instead of using the standard SME definition – or even the term SME in general – we have a new definition, the ‘emerging mid-market’, which helps us identify the client we can best work with.
An emerging mid-market enterprise (EME) is one with underlying profits of around £300,000 or more, which is capable of being run by a professional management team. It has material growth prospects with headroom in its market, either through organic growth, acquisitions to consolidate or by being better than the competition and taking market share.
Today we have a global and increasingly virtual economy. Ideas are more valuable than capital and, with vision, the opportunities are immense. The UK has some of the best minds in the world, yet we have some of the lowest productivity in Europe.
We have the talent, and often the vision, yet fail to back this with the right support at the right time. So, let’s put the definition of SME in Room 101 – it gets in the way of building to the stars.
Avondale are EME business advisors. Through our management consultancy, we support growth and scaling up. Through our M&A and corporate work, we secure investment and finance for EME businesses, help people buy and sell companies and enhance shareholder value. We recognise ambitious owners who require ambitious, specialist advisors.