Why Export

The following information is from the Milwaukee “Global Cities Initiative,” which is an initiative of the Milwaukee 7 to double area exports in 5 years.  This Initiative is sponsored by JP Morgan and the Brookings Institute.  More information is available at this link.

Exporting opens and offers a company the opportunity to enter the global marketplace, which represent upward of 95% of the spending power in the world. Exporting enables companies to extend the life-cycle of products, and better leverage both capital and labor resources. And exporting can provide companies with stronger and more sustainable cash flows. Finally, for the M7 region in the counties surrounding Milwaukee, exporting has been a principal source of growth, and companies that want to grow quicker should be thinking about exporting. 

In the interview and surveys, we wanted to identify what might push a CEO toward making the decision to start exporting, or to export more. The rational argument for pursuing exports is easy to make; that’s where the big market opportunity lies and where we’ve found strong growth over the past decade. However, we know that humans make decisions principally on an emotional basis and then use a rational argument to support the emotional decision. We want to be able to set up that emotional decision.

We discovered three things. First, in the surveys we asked a forward looking question to try to identify what caught a CEO’s interest. The item that leapt to the front was this valuation argument:

Traditionally when an investor looks to place a value on a company, they look at EBITDA (earnings before interest, taxes, depreciation, and amortization) and apply a multiple to that number. Exports tend to have a positive impact on margins because most export sales leverage the existing capital base and the existing labor capabilities. Thus, no new capital is needed, nor is labor training and development required.

Let’s take a $1M EBITDA M7 company that gets into exporting to a couple of countries, say, Canada and Mexico. This incremental business drives $200,000 to the EBITDA line making total EBITDA $1.2M. if the multiple is 5x, then the company has gone from a valuation of $5M to $6M. Not bad for leveraging existing capabilities. And there’s more. The multiple is determined by a number of factors, and a key factor is market risk. When you export to multiple markets you reduce your market risk because you are no longer as vulnerable to the ebbs and flows of a single economy. You also demonstrate an ability to tap into the much larger global market. This lowering of market risk and expansion of possible future revenues has a positive impact on the multiple. For our example, the multiple goes from 5 to 6. Thus, by exporting into a couple of countries your company valuation goes from $5M to $7.2M, or nearly a 50% increase in value.

Second, CEOs were excited by the impact on cash you can enjoy from exporting. Cash flows can tend to be more predictable and more sustainable.

Third, stories of export success around SMEs often revolved around some serendipitous event.   Most of these serendipitous events lend themselves to a more purposeful process. If we put in place an infrastructure that allows the right flow of information, then we might replace the ‘luck’ factor with a more ‘sure-thing’ methodology. This also piqued the interest of CEOs. 

The Milwaukee 7 was launched in September 2005 and was formed to create a regional, cooperative economic development platform for the seven counties of southeastern Wisconsin: Kenosha, Milwaukee, Ozaukee, Racine, Walworth, Washington and Waukesha. Its mission is to attract, retain and grow diverse businesses and talent.