Strange as it sounds, a new American dream for many business owners is to sell their companies to foreign buyers. There is just something so exotic and romantic about the idea of selling your company to the highest bidder from France, England or China. However, is it logical or even rational to think a buyer from outside the USA or Canada will be knocking on your door soon to acquire your company? This month we discuss Foreign Buyers: Myth or Reality?
You know the story. You decide you want to either grow your business with outside funding or you are determined to sell the company outright. You don’t want to approach your local competitors for fear of what this could do to your business but you think the products and services you provide would be a perfect fit for a company based in Europe or Asia. In addition, you tell yourself because a European or Asian company needs to gain a toehold in the USA, this potential buyer will gladly overpay you for the opportunity to enter the US market.
Unfortunately, the reality for most owners of businesses in the USA is unless they have unique or proprietary services or products, they probably won’t be an attractive target for foreign acquirers. Based on our experience with cross-border transactions, the following are the general characteristics of companies of interest to foreign buyers:
Size
Broadly speaking, foreign buyers are interested in companies in the USA with a minimum of $30 million in revenues. If the acquisition is an add-on for an existing operation the buyer has in North America, they might consider companies with as little as $5 million in annual sales. However, in our experience, we have not been able to get foreign buyers interested in US companies with less than $30 million in annual sales.
Management
If you do not have a strong management team in place willing to remain after a sale, foreign acquirers will have little to no interest in your business. Unless the potential acquirer already has a strong presence in the USA, they probably will not have the ability to replace the management team of the acquired company. Some European and Asian buyers will relocate managers from the “home office,” but that generally only happens when they are acquiring very large companies.
Profitability
Foreign buyers want to acquire profitable companies. In general, unless you have a minimum of $2 million of annual operating profit, it will be hard to get any attention or interest from foreign buyers. While the cost of doing business across the ocean has gone down over the years, it is not an inexpensive proposition. A few years ago, we were selling a very profitable imaging supplies distributor, one we thought perfect for a German company we knew was keen to enter the US market. Our client’s annual operating profit was approximately $1 million. The German CEO called me and said, “We like the company but it is just too small. We will spend most of the annual profit in travel expenses coming to visit the company.” Perhaps a bit of an exaggeration on his part, but I think you get the idea.
Product/Service
Most American business owners think foreign buyers want to acquire US companies to just enter the US market. However, as we have learned from our cross-border transaction experience, most foreign buyers tend to think in terms of global markets. Thus, they want to acquire American businesses producing products or services saleable or marketable on a worldwide basis, rather than to local markets only. If your product or service only plays well in Peoria and would not have any value in Prague, Paris or Peru, a foreign buyer will not soon be beating a path to your door. Furthermore, our experience shows foreign buyers want US companies who provide proprietary products or services to their customers.
End of the day, if yours is a “me too” business with sales and earnings of less than $30 million and $2 million, respectively, selling to a foreign buyer is probably a myth for you and your company. However, if you do have a proprietary product or service which can be scaled for an international market, your business has a good management team willing to remain with the company, and you are profitable, then selling to a foreign buyer may be a reality for you.
I am happy to answer any of your questions regarding this subject or any previous articles. In my next article, I’ll discuss the subject: The Challenges of Selling to/Working With Foreign Buyers.
