SMEs represent 99% of all businesses in the European Union (EU). SMEs play an essential role in the EU economy – but what is an SME and how are SMEs defined?  

SME meaning: what does SME stand for? 

SME stands for small and medium-sized enterprises and they can be defined as businesses that have revenues, assets, or a number of employees below a certain threshold.

The EU definition of an SME is a business with fewer than 250 employees, and with an annual turnover of less than €50 million, or a balance sheet total of less than €43 million. 

You can use this SME self-assessment tool to determine whether your company qualifies as a small and medium-sized enterprise.

Example of an SME

Here are some examples of businesses you would expect to fall under the SME category according to simplybuisness.co.uk:

• Online retailers 
• Cleaners 
• Hairdressers 
• Beauty therapists 
• Caterers 
• Contractors 
• Tradespeople

What is an SME company?

SME is an umbrella term and SMEs can be placed into three categories: micro-businesses, small businesses, and medium-sized businesses. We will define these below: 

What is a micro-business?

A micro-business can be defined as a company with ten employees or fewer and an annual turnover of less than €2 million.

What is a small business?

Small businesses have between 10 and 50 employees and an annual turnover that is above €2 million but below €10 million.

What is a medium business?

To be classed as a medium-sized business, a company must have 50-250 employees and an annual turnover that is above €10 million but below €50 million.

If a company exceeds this number of employees or annual turnover, it will be classified as a large enterprise rather than an SME.

How many SMEs are there in Europe?

Statistics show that there were approximately 22.6 million SMEs in the EU in 2021. As mentioned above, SMEs represent 99% of all businesses in the EU, making them the backbone of Europe’s economy. 

How do I start an SME?

Starting an SME can be highly rewarding and lucrative, but it can also be challenging and a high number of SMEs fail in their first year. 

If you think you have what it takes, here are some of the steps you will need to follow to start an SME: 

Step 1: Conduct market research 

Market research is important in the early stages of starting a business. You need to validate your business idea, carry out competitor analysis, and understand how to market your product or service to your target audience. 

Step 2: Build a business plan 

Writing a detailed business plan is an essential step when starting a business, regardless of size or industry. Your business plan will guide your SME right through to growth and expansion. 

The document will also be used to convince investors and other key stakeholders why they should invest in your business idea and support your SME. Read this article by Shopify for a step-by-step guide on how to write a perfect business plan. 

Step 3: Apply for business finance

All SMEs need funding to get up and running. There are various ways to finance a small business such as business bank loans and angel investors. 

Read our recent blog for more guidance on how to get funding for your SME. 

Step 4: Market your SME

Your business plan should outline your advertising strategies to get your brand and products in front of your target customers. You must allocate a percentage of your revenue towards your marketing budget.

Why do SMEs fail? 

Statistics by Fundera show that 20% of SMEs fail in their first year, 50% of SMEs fail after five years, and 70% of small business owners fail in their 10th year of operation. SMEs can fail for several reasons which may include:

• Cashflow problems: Inadequate funding accounts for up to 82% of SMEs that fail. 
• Poor business planning: SME owners must have a clear vision for their business and develop a product that meets the market need. 
• Lack of experience: Entrepreneurs with minimal experience often struggle to overcome common small business challenges and stand out in the competitive SME sector. 

Is there a better way to manage an SME? 

Starting an SME is a huge challenge and only a small percentage of entrepreneurs manage to build a successful business from scratch. The good news is that it is possible to acquire an established SME and skip the risky startup phase altogether. 

A Search Fund is an investment vehicle through which an entrepreneur can acquire and grow an established SME, rather than build a business from the ground up. It essentially gives entrepreneurs a fast track to becoming the CEO of a profitable SME. 

Search Funds have been popular in the US since the 1980s and they are now gaining traction in other parts of the world, namely Europe. The Search Fund model offers a fantastic alternative for entrepreneurs wanting to manage and scale an SME, without the risks of launching a startup. 

Acquiring an SME through a Search Fund

How do Search Funds work?

The searcher raises capital from investors to support a two-year search period for a suitable company. If a suitable company is identified, the searcher will acquire it and manage it for several years with the goal of scaling it toward a profitable exit.

The profit from the sale is then distributed among the Search Fund investors and the entrepreneur also gets an equity share in the SME. 

What are the benefits?

The biggest advantage of a Search Fund is that it allows entrepreneurs to manage and scale an established SME. Acquiring a company that has been operating for many years significantly increases the chances of business success when compared to starting a business from scratch.

IESE’s International Search Fund Study 2020 shows that 89% of Search Fund acquisitions make a return, whereas 60% of SMEs fail within three years according to recent business stats. 

Another major benefit of acquiring an SME through a Search Fund is that the entrepreneur is supported by a team of experienced and active investors. Many Search Fund investors have an in-depth knowledge of the industry and provide valuable support during the search and running of an SME. 

Get in touch with the SME experts at Moonbase Capital

The Moonbase Capital partners have more than 50 years of experience managing SMEs. We form close partnerships with entrepreneurs and support them at every step of the Search Fund journey.

Get in touch if you would like expert guidance on acquiring an SME through a Search Fund. We are always happy to help!