Size and financing of external growth strategies among small and medium enterprises

This research analyzes the effects of size on the financial decisions of unlisted small‐ and medium‐sized enterprises (SMEs) engaged in external growth. Among 259 French SMEs that undertook external growth investments, this effort accelerated their growth trajectories when they were able to overcome financial constraints specific to their size. Despite the resulting loss of control, financing of external growth thus requires equity raising. In the specific context of consolidating sectors, in which increasing size is vital, operations can be financed partly by share‐based payments. In this way, targets' owners remain shareholders and benefit from the improved performance brought about by consolidation.