According to the European Commission, 99 per cent of Europe’s businesses are small and medium-sized enterprises (SMEs). A business is regarded as an SME if it has fewer than 250 employees and revenue below €50 million. Many of these SMEs are still family-owned businesses.

Family SMEs are having a tough time across Europe. Some are prospering, but many are finding it difficult to cope in an increasingly internationalised business community. Before, a Danish SME might have sold its goods to customers in Sweden, Germany and the UK but, with the European crisis and low growth expectations, they are now forced to find their new business far away – in South America, Africa and Asia, including China.

Many SMEs are innovative. In engineering, especially, a great number of them have very good products that are linked to global concerns about the future: clean environment, water treatment and life sciences, to name a few. These SMEs have often been very close to customers, so their service concept is good. And the family patriarch may have been in charge for decades, running the show while simultaneously dealing with sourcing, sales and management.

This approach – combining innovation, good products and great service – is very attractive to Chinese investors. They see an opportunity to invest, with the aim of developing such companies into more international businesses. Here lies the challenge!

Imagine this: a Chinese investor finds a good SME with internationally applicable products but it has yet to internationalise. This would be a very good case for growth. The Chinese investor has €10 million to spend and approaches the SME with a proposal: “We will buy into your business, become co-owners and give you €10 million to grow it.” However, the response is usually a deal-killer: “I will take the €10 million, but keep €3 million for myself and my family as payment for all our hard work so far.”

Sadly, many interesting business opportunities stall at such a point. The Chinese investor sees the request for a “pay-out” as a show-stopper. The pay-out takes away the incentive for the family to work hard to grow the business in a partnership with the investor. So negotiations come to a standstill.

In such a case, the family SME owner’s wish to cash in prevents the business being a candidate for Chinese investment. The two parties’ interests are not aligned. Whereas the Chinese investor wants to grow the business with the family and is prepared to risk millions of euros, the family wants certainty and prefers its euros in the bank. A cultural clash between entrepreneurship and security becomes apparent.

What is the solution?

Europeans need to open up. We have benefitted from American investment for decades, and now the time has come to switch on the charm for investors from newer economies. Whereas the Americans have often bought European businesses 100 per cent, new investor communities often think in partnerships. European SME owners need to understand that their pensions may still be ten years or more away – after achieving success.

As a lawyer who advises on this type of transaction, I appreciate that European SME owners must, of course, conduct due diligence on new business partners but this should not prevent owners being open to new ideas about business structures. Trust is the number one priority for partnerships so, as a business owner, you will need to invest time in getting to know your partner (and the Chinese tradition of “dinner before business” is worth remembering). Perhaps the best way forward, bearing in mind the economic growth taking place beyond our European borders, is for SMEs to look to countries like China for new business opportunities. Having a Chinese partner and investor on board may well make for plainer sailing.

Our best practice tips are:

  • Be open: don’t be afraid to enter into strategic partnerships with Chinese investors.
  • Be patient: don’t necessarily ask to cash in up front; in a partnership with a Chinese investor, you might not harvest the fruits of your labour until later.
  • Be careful: conduct proper due diligence on your new business partner.
  • Be prudent: establish a solid contractual framework and company structure, preferably in Europe so that enforcement is transparent and predictable.