Increasing Numbers of Foreign Buyers are Looking for US Acquisitions

We sold a small screen printing business earlier this year to an individual buyer from Mexico. That buyer inquired about the business and consummated the transaction within 5 months. This is an incredibly fast transaction considering the visa approvals necessary to transfer a business to a foreign based buyer.

I was surprised by the recent buyer inquiries we have received in our offices. From the period of May 24, 2009 to June 23, 2009, seven percent of our activity was from a foreign location. You might think that the majority were from our neighbors to the north and south – that was not the case. A small percentage of this activity originated in Canada and Mexico. The majority of the buyer interest came from Europe and the Middle East.

Most surprising is how this has changed over the last 3 years. We were accustomed to receiving a handful of inquiries from distant locations but they were inconsequential. This is no longer the case. For several reasons I believe this is good news for sellers. Buying a business has become one of the more effective methods of immigrating into the United States. In fact, there are a healthy number of attorney’s who specialize in helping people immigrate with this type of transaction. There are different types of visas and we strongly recommend hiring experienced advisors. The higher impact for sellers is the opportunity to receive a higher value for the business. Typically buyers need a seller to ensure an orderly transition. In the case of a foreign buyer, this portion of the transaction because critical and thus should yield the seller additional value in the form of a higher multiple, employment contract and/or incentives tied to the future performance of the business.

Lastly, most of the visas associated with this type of transaction require that the buyer invest in the business and potentially add a minimum number of jobs over a defined period of time. This bodes well for the existing employees of the business and the community at large. Sellers should treat foreign buyer inquiries with equal amounts of interest and caution, while making certain that your business intermediary understands the nuisances of these types of transactions.

The Importance of a Valuation when Selling a Business

A recent survey by George S. May International revealed that 58% of respondents had never had a formal business valuation, yet 29% were considering a sale in the next one to four years. I am continually perplexed by the number of business owners who do not regard this step as a critical factor in selling their businesses, especially since the business is probably their largest single asset.

I commonly hear from owners that they do not want to spend the money, their accountant will tell them the value, the business broker should be able to provide a market price, or that they know the price - which was based solely on a gut feeling. After years of running a successful operation, this seems like such a reckless way to handle the final stage of business ownership.

While I believe a valuation is imperative to a successful transaction, not all valuations are created equal. There can be wide disparities in the content of a valuation report, the costs, the credentials of the appraiser and the usefulness in securing a business sale. For example, GCF Valuation is one of the leading independent appraisers in the country. We have found their reports to be comprehensive and thorough, while at the same time being very cost efficient. They have accreditation from all the major governing bodies for professional appraisers.

Below are some of the key points when considering a valuation:

1- Real value. The key to a successful listing is having the business priced appropriately. If the value does not meet your expectations, the report should give you a roadmap of how to increase the value. Understanding the key value drivers can help you run your business more effectively.
2- Unbiased opinion. Prospective buyers are more likely to engage in negotiating knowing that the asking process has been set from someone other than the seller, the seller’s CPA or the business broker.
3- Time. A properly valued business should spend less time on the market, attract more buyers and result in a better return for the seller.
4- Brokers are not appraisers. Contrary to what sellers believe, brokers are typically not certified appraisers. While a broker’s valuable market experience can provide guidance in what the market will bare and generate multiple buyers, they are not equipped to establish a value.
5- Fees vs. returns. It is so easy to get caught up in the cost of a valuation and lose sight of the bigger goal, which is maximizing the return on the business. A professionally prepared valuation is one of the most important tools a broker and seller will have in securing a successful outcome.

A valuation for purposes of selling a business should not be exorbitantly priced. A typical small business valuation should range from $2,500 to $8,000 depending on the size and complexity of the business. Most professional advisors would agree that this is a small price to pay to know the true value of your largest asset.

Is now a good time to sell a business

I was invited to be a guest on the Business Insanity Radio show hosted by Barry Moltz. Below is a brief recap of the topics we covered during the show and click here to listen to a replay.

Given the shaky economy is now really a good time to Sell a Business? Now may be a great time given the sheer number of buyers in the marketplace right now. The number of buyers we are working with compared to the same period last year is up by a factor of three. If your business has solid fundamentals and you have plan, this is the time to talk with a professional intermediary. For example, our firm currently represents a B2B services business that has had flat sales the past two years and slightly fluctuating cash flows. This business has received five offers and this should result in an attractive exit for the owner.

How are you finding the buyers? We are dealing with strategic buyers and individual investors. The strategic buyers see a great opportunity to grow market share and top-line revenues. Individuals, largely the unemployed masses, are looking to replace an income and use this opportunity to gain some control of their careers and futures.

How are deals getting financed? Financing has become our biggest challenge but it may also be an opportunity for sellers. On the challenging side, the banks have almost completely withdrawn from the business acquisition lending market. Many of the banks have made their underwriting requirements so onerous that the bankers are not even bothering with these types of loans. In addition, the SBA implemented an SOP change that went into effect March 1st. It limits the amount of goodwill in a business acquisition loan to a maximum of 50% of the total loan, or a hard cap of $250k, whichever is greater. With our large service-based economy most of our deals easily eclipse the SBA benchmark and, as a result, the banks do not want to deal with these opportunities.

On the positive side, this is an opportunity for the sellers to gain control of their deals by offering seller financing. While there are risks associated with this financing strategy, there can be significant upside, for example: interest rates of up to 10 percent, a first secured position, deferred and potentially lower taxes, and faster transaction times. It is worth saying that the right advisors, with actual experience with seller notes, are imperative to ensuring a good deal for all the parties.

With the right plan and the right advisors, now might be a great time to exit the business.

Confidentiality

Confidentiality is not just a seller issue. A buyer needs to be very concerned that the sale of a business is handled with care when it comes to employees, clients and vendors. I am continually surprised at the cavalier approach some buyers and sellers take to this critical issue.

A buyer on one of our listings made an innocent, but very disruptive, mistake during the due diligence stage of a deal. The buyer and seller had negotiated a contract for sale and the buyer was reviewing the operational and financial records of the business. During the buyer's discovery process he decided to contact an industry third-party to ensure that the company was in ‘good standing’ and all licensing was up-to-date. Seems like a reasonable step in the process, UNTIL the person the buyer called started to ask questions about who was calling and why the buyer wanted this information.

What the buyer did not know was that the person on the phone knew the company very well and, in fact, several of the employees were his friends. The buyer immediately realized this call was a mistake and he requested that the contact keep the call confidential.

The very next day the sellers arrived at the office to a group of anxious employees. The dam was breached, as the contact at the industry third-party wasted no time in calling his friends at the company.

The business is now at risk. When employees find out a business is for sale prior to the transaction closing they become nervous and their survival instincts kick in. They start to ask lots of questions and this atmosphere of uncertainty can cause them to start looking for other opportunities, become destructive or hold the deal hostage by placing demands on the buyer or seller.

The risks are obvious for the seller. The buyer may also be impacted should they take over a business with disgruntled employees. No good can come from compromising the confidentiality of a business. Any demands during a negotiation to meet with employees, clients or vendors should be resisted or the consequences can be devastating.