American businesses are very attractive to cross-border and overseas investors looking to gain access to the highly coveted American market. Many of these investors are willing to pay top dollar; however, with so many companies in so many industries to choose from, foreign buyers can afford to be selective. So how do you attract the attention of these wealthy overseas buyers? Where are they located, and what are they looking for in an American company? Our guest shares his deep knowledge of the increased interest in American businesses from abroad. Join Jeff Allen as he speaks with Mr. Howard Johnson, managing director of Veracap M&A International Inc.
My rule of thumb is I like to count the number of serious, qualified buyers on one hand but not one finger.
- Howard Johnson
Well, one thing that we like to talk about from time to time here on Deal Talk is selling your business. In fact, that's kind of what our program is really all about, it's giving you the information that you need in order to make good choices, good strong decisions to help build your confidence about where your business is headed and where you want to be ultimately in selling your business at the end of the day, whenever it's time. One of the things we like to also discuss in and among those topics that are kind of centered around selling your business and getting you ready, helping you to move forward with that exit strategy, is selling your business to those buyers no matter where they are in the world and there's a lot of activity right now that is going on across borders and overseas involving American companies and some people may suggest it's just a product of the economy and others may suggest that times have changed. There are new opportunities on the rise no matter where you turn. We've got a perfect guest to talk about this subject right now on the Morgan & Westfield guest line. His name is Mr. Howard Johnson, Managing Director of Veracap M&A International, Inc. and President of M&A International. And just by going through his LinkedIn profile alone I can tell you this guy has more designations than my wife has shoes. Howard Johnson, it’s nice to have you on the line. Thanks so much agreeing to join us on Deal Talk today.
Howard: Sure, it's my pleasure.
Jeff: Howard tell us a little bit about your company. You're a managing director there at Veracap M&A International and president of M&A international. Tell us a little bit about both organizations what you do.
Howard: Yeah, so Veracap M&A International is a mid-market investment bank which is loosely defined as the company that's looking after transactions in the order of, well, $5 million to $10 million in the lower end and a couple of a hundred million dollars in the higher end. Typically in established economies such as everything from technology, to construction, to food and beverage and so on. We act on behalf of buyers as well as sellers at the time and we also do some financing and corporate advisory work. We are part of a large global organization, which I'm the president, called M&A International. And we have 650 professionals in 43 countries and we work seamlessly together to help in executing cross border transactions in a variety of industries. So we have 13 industry verticals ranging from health care, to food and beverage, to technology, to aerospace and automotive among others. And we work to bring the expertise on board so that a seller of a company, for example, can find a buyer whether they're located in another state or halfway around the world.
Jeff: I think you can see ladies and gentlemen that we have somebody on the line who knows a little something about our subject today and that is cross-border M&A or in other words just simply selling your business to overseas buyers or those buyers across the border who would be interested and let's start our conversation by talking a little bit about ... Howard, you know, a lot of people wonder right now is this a good time to sell a business to an overseas buyer or a buyer across the border just over there in Canada where you are or in Mexico? Tell us just based on what you're hearing from your team, what you're reading and what you understand about the current climate for businesses and buying American businesses right now.
Howard: Currently there's as much buoyancy today as it was back in 2007. And of course we all know what happened in 2008. I don't see a major drop coming as we did have in 2008. However, I think that there is certainly more downside risk than upside potential so I think we’re at a point where it's pretty much as good as it's going to get. We have about a trillion dollars worth of capital that is looking for a home. It's an astonishing and unprecedented amount. This is not only in the United States but in all parts of the world. There's a lot of money to be invested in businesses and part of it is funded because there's a lot of cheap debt that's easily accessible and its light covenants. But there's also a lot of corporate and strategic buyers out there that have a lot of cash in their balance sheet and they need to put that cash to work. This is particularly the case for companies that are in Europe and in other parts of North America and in Asia where they are looking not just for growth but also the important stuff, diversification that comes with entering into another country. So for example if there’s a company that's based in the UK or in Germany, or in Canada or Mexico and they are looking to say, “Not only do we want to blow our top line but we want to make sure that it's smart growth by having a new customer base, by having a different geography, by having a different management team,” because diversification ultimately helps in creating economic value, they will often look to an acquisition in the United States or other parts of the world in order to achieve that objective.
We act on behalf of buyers as well as sellers at the time and we also do some financing and corporate advisory work.
Jeff: Let's call them investors, Howard, because that in fact is exactly what they are. But I'm kind of wondering right now, are most of these investors are looking for controlling interest, buying a sizable share of a company, what have you been finding out?
Howard: Controlling interests are typically what investors look for. So there's two types, if it’s a corporate buyer, they usually want to buy 100 percent because by and large they don't like having the nuisance of the minority shareholders. However, private equity firms work within the United States as well as other parts of the world typically want to buy less than 100 percent although a majority position but ensure that the existing founders maintain an equity interest in order to align everybody's interest going forward, and importantly provide managers, the management team with an equity interest to get them excited about bringing the business to the next level all in contemplation of an exit strategy again five years down the road, give or take.
Jeff: You talked about the pile of money that are sitting on the sidelines and we heard going way back to 2008, 2009, 2010 that companies were starting to stockpile, maybe not as far back as 2008 but companies were starting to put kind of put away money for that time when the economy turned itself around, when the financial markets turned themselves around, that they would have some leverage, that they would be able to kind of go out and expand their product and service lines, and acquire companies. Would an American business owner right now regardless of industry likely be able to get the full price he or she's looking for from an overseas buyer right now? How competitive are those buyers across borders with American buyers for businesses that are here?
Howard: Well I think it depends on the business itself. However getting a good value for a business is usually a function of how effective the option is carried out. So an effective option usually has a handful of the right buyers. My rule of thumb is I like to count the number of serious, qualified buyers on one hand but not one finger. And that usually means having the right three, four, five different groups at the table. That means financial investors as well as buyers from the United States or overseas. So they're all driven by the same economic principles in terms of wanting a return on their capital. An overseas buyer right now will look at the United States and recognize that it is one of the true growth areas within the entire world. We're seeing slowdowns in Asia, we’re seeing slowdowns in Europe, and therefore anybody looking for growth will oftentimes go to the United States because the economy there has been very well over the course of the past couple of years. And I think that most people feel pretty confident about 2016, by and large election years tend to be pretty buoyant years. Beyond that it's anybody's guess. But I think in the near term things bode well and buyers are like to buy into a growing market and a growing company. So the timing I think is the ideal for anybody that is thinking about divesting.
Well I think it depends on the business itself. However getting a good value for a business is usually a function of how effective the option is carried out
Jeff: Where is most of the interest coming from right now that you can see, Howard Johnson? Once again, Howard Johnson is Managing Director of Veracap M&A International, Inc. and President of M&A International in Toronto. Your team is all over the world. I think you said 40 countries if I'm not mistaken. Where are most of the interested buyers from right now and just tell us a little bit about that?
Howard: I think there are various pockets of interested buyers from around the world. US buyers are very, very active right now. But outside of the US I think there are a few pockets. One is certain countries within Europe. Germany and the UK immediately come to mind as two countries that have an interest, and surprisingly even some of the Norwegian or Scandinavian countries rather, there are companies that are within Sweden, Norway, and Finland that do have significant pools of capital and have done very well, and are looking to grow and expand beyond Europe which was their traditional purchasing ground. We're also seeing many South American investors. Look at the 3G Capital out of Brazil, a major buyer of corporations in the United States. There are many Canadian buyers as well but less so of the Asian buyers. One of the things we oftentimes hear entrepreneurs thinking about is that there's an Asian buyer, a buyer from China, or Japan, and so on that is going to be come in and pay a premium for their business. We find that Asian buyers are not as frequent buyers of US companies as are European, Canadian, and South American buyers. Although when the Asian buyers do make an acquisition it tends to be a larger one, and therefore hits the headlines and therefore many people perceive that there’s more activity from the Asia Pacific region that is actually the case. So for most mid-market businesses, those that might be worth anywhere between 10 million and a 100 million for example, it's more likely that the buyer if they come from outside of the United States is going to come from Canada, Mexico, or Europe because those pools of capital understand and appreciate the dynamics of what's happening in the American market.
Jeff: Are you seeing any kind of growth whatsoever from the BRIC nations? We talked about China already in so far as Asia but I mean as far India and as far as Brazil, any growth in interest there in American companies in those terms?
Howard: I believe that there certainly is. Brazil has had its challenges but there are some large pockets or pockets of larger companies in Brazil and it's the same with India. So if you look at companies in India such as Tata, that's a large, multinational buyer, they're always very active. And they have significant operations already within North America, and therefore adding on to that is just a natural extension. Those pools of capital still can be quite aggressive.
We find that Asian buyers are not as frequent buyers of US companies as are European, Canadian, and South American buyers.
Jeff: We're talking with Howard Johnson, managing director of Veracap M&A International, Inc. and President of M&A International in Toronto, Ontario, Canada and we are discussing overseas interest in your business. If you are a business owner right now and you have it in your exit strategy to sell your business, I don't know, within the next two to five years this is a program that is really geared toward you because we're trying to get an idea for just how brisk or how strong the interest is in overseas buyers in American businesses. And we're going to continue our discussion when Deal Talk resumes after this.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with Howard Johnson, managing director of Veracap M&A International talking about overseas M&A involving American-based companies, domestic companies looking for buyers overseas or cross borders and there's a wide ranging of discussion we're having here on this particular program today and I know that we'll probably want to have Howard on. I could probably, not that I'm telegraphing this at all but probably looked at having Howard back on for a second visit because there's so much to discuss. Howard, once again, I appreciate you joining us today on Deal Talk. Let's talk about the kinds of industries in business lines that are kind of attractive right now to foreign buyers, any that you can share with us right now that are really getting a big look from foreign interests.
Howard: Certainly I think if there's various categories or various industries three of them come top of mind being a particular interest to foreign buyers. The top one is information technology. The United States has the benefit of many very strong information technology companies and it's really a question of buying versus build it for a lot of the European and other foreign buyers. One of the reasons information technology is so attractive is because it's scalable. So if a European company for example buys a US-based information technology company, often that technology can be transplanted over to Europe and used in the buyer's main operations. So that’s certainly number one. Another key area that has certainly been strong of late is the whole industrial services area including things like construction and business-to-business type of companies. One of the reasons for that is simply the strength of the US economy over the past couple of years. As housing has come back and as a lot more industrial production has ramped up this creates a lot of growth and a lot of excitement. And European and companies from other parts of the world that are looking for growth like to acquire companies that are in a growing economy and that's been the United States of late. And the third area that is very strong of late is certainly health care. With all of the potential changes in health care in the United States this has created a flurry of acquisitions and roll ups both by American-based companies as well as by foreign companies that are looking for a strong foothold in the United States. And again, it's oftentimes easier to buy rather than build, especially when you have nuances of a industry sector such as health care.
Jeff: How often do you actually see, Howard Johnson, a company from overseas acquire an American interest, American company, small business perhaps, $1-$50 million in annual revenue and then just take the whole thing, lock, stock, and barrel overseas as opposed to actually leave the corporate center for that company in the United States? Or if it's a company based in Canada, for example, in your country, how often do you actually see a center for business and office with the corporate headquarters for that company actually leave and go overseas and everything is gone?
Howard: It tends to be unusual. And the reason I say that is because when you're talking about mid-market businesses in particular, usually the best buyer is what we call a platform buyer. And a platform buyer usually isn’t a direct competitor that wants to shut everything down and just save a bunch of cost. They're making the acquisition because they foresee top line growth. So most buyers are very interested in the customer base a seller has. They're interested in their technology, they're interested in their management and their people. So while there are sometimes some headcount reductions and consolidation of back office functions it's rare that you'll see an entire operation being folded up and consolidated in a foreign country. Because the people that are on the ground, the sales people, the operations people, the key managers that are facing the critical customer, they have to stay there. And the best buyers are those that will look over and say to the US seller, “If I had your people, if I had your products, if I had your customers I could do a lot more with that because I can sell them some of my products” and so on. And so it tends to be a matter of building on that acquisition as opposed to reducing what's already been acquired.
One of the reasons information technology is so attractive is because it's scalable. So if a European company for example buys a US-based information technology company, often that technology can be transplanted over to Europe and used in the buyer's main operations.
Jeff: Why might move to be acquired by a foreign based entity be favorable to maybe being acquired by a domestic buyer for example?
Howard: Well, I think there's a few advantages of dealing with a foreign-based entity. First of all to many foreign based entities the US seller will represent a greater strategic asset. In other words that foreign entity will see more strategic value to the acquisition because it will be a brand new customer base for them. It will be geographic diversification, it will be entry into a key marketplace, and oftentimes the foreign entities will be prepared to pay a significant premium as contrasted with another US-based company that may already have very similar customers and geographic coverage. Another advantage of a foreign buyer is that unlike the US buyer that maybe a little close to the knitting and a little bit competitive, and therefore there's a risk in sharing sensitive information, oftentimes that’s not the case with the foreign buyer whereas if they don't make the acquisition they're not going to start-up and do it themselves because they really need that new platform. And the third item is that a lot of these foreign entities have accumulated significant amounts of capital over the course of the past number of years and they just have to put it to work. And acquisitions and growing economies are often very attractive.
Jeff: Risks and pitfalls now. We've talked about the good. Let's talk about some of the not so good involved with merging a domestic company or selling outright to across border buyer.
Howard: Well I think that there are a number of risks and pitfalls. Number one is people and culture. So a lot of foreign buyers just don't understand the way that business operate in the United States. To many buyers with a much faster pace, they're just not used to it and therefore they have trouble getting up to speed with what happens among the US company. Number two is that the buyer may be wary about foreign exchange risk with the fluctuation between the US dollar and let's say the Euro or the Yen. Sometimes that perception of risk causes them to be a little more cautious about how much they're willing to pay. And the third issue, and particularly when you're trying to integrate the cultures, is just that after the fact oftentimes there are communications difficulties, they may be language differences, there may be differences between the ways the buyer and the US seller traditionally operate. So to the business owner that has routine and equity interest or it continues on in a management situation it can oftentimes be very frustrating in dealing with a foreign buyer. So it's not all upside, these downside risks have to be weighed as well.
So it's not all upside, these downside risks have to be weighed as well.
Jeff: With the understanding that the risk is often worth the reward, what does a business owner have to do to attract a foreign-based buyer? If there's somebody out there, for example you talked about in very general terms the amount of cash that's on the sideline and people are waiting for opportunities. I think probably both sides, both buyers and sellers are. How can I make my business more attractive to a company overseas for example or just across the border?
Howard: I think there are a number of initiatives. Number one, when it comes to cross-border transactions, size does matter. So it's more difficult to attract a European-based buyer to a very small business, one that's doing say less than $2 million of pre-tax income a year than a larger business because if a foreign buyer is going to venture into the United States they're going to want it to be usually a meaningful size transaction because there's a lot of cost and time involved in doing the transaction so they want it to move the needle, and therefore they tend to look for mid-sized and larger companies as opposed to some of the smaller companies. The second item though I believe is really important in a strong management team beneath the business owner. Because when a foreign buyer makes an acquisition they're going to be very sensitive about the fact that if they put a whole bunch of money into the owner's pocket at closing and that person disappears within a few months or a year they'll ask themselves who's going to run that shop after the acquisition has been made. Because if there's not a strong management team, a foreign buyer will have more difficulty in managing that transition than somebody else that's just down the street. And the third item that I think makes a US company an attractive acquisition target is that whole customer base. So is there a customer base and is there some proprietary technology or something special about the product and service offerings that makes the company being sold differentiated and provides them with a longer term competitive advantage so that the foreign buyer is in a position where they have to buy it as opposed to build it.
Jeff: Really important feedback, Howard. Thank you so much. Now, I'd be interested in knowing though the transaction itself. We all know and we've heard stories about how long it can take to sell a business often times and you could include the due diligence as part of the process on both sides, both buy and sell side, and that itself can take many months, and in some cases even longer than that depending on the size of the company. But the process itself, any more difficult, does it take less time, does it take longer, more people involved tell us how that all works out. And you have the advantage of basically being involved in these transactions right on the front line so we'd be interested in hearing your feedback on this.
Howard: Okay. So in a lot of cases or in most cases the sale of a business, once you actually start actively selling it and you've done all the groundwork, the sale of a business often takes between six and 12 months depending on the size, the complexity, and so on. As a general rule selling to a foreign buyer takes a little bit longer for a few reasons. Number one is that the foreign buyer might take a little bit more time to assess whether or not the fit is right. So the foreign buyer will often have a more of a learning curve especially if they don't have an existing operation in the United States. They'll take them longer to get up to speed with respect to the market opportunities, the customers and so on. Secondly, many foreign buyers, for example Japanese companies, while they tend to pay higher values they also tend to move very slowly because they look for every action by consensus, and it takes them a while to build by consensus and sometimes this drags on. The third issue that can sometimes cause a further delay, and it happens more often with larger companies as opposed to smaller ones is if there's any competition for your review that has to be conducted as a result of a foreign buyer coming into the US market.
Because if there's not a strong management team, a foreign buyer will have more difficulty in managing that transition than somebody else that's just down the street.
Jeff: Excellent. Howard Johnson, we've run short on time and we're going to have to kind of wind things down a little bit now. But for those individuals who might be listening to the program today who are interested in talking to you, sir, or a member of your team about potentially engaging an overseas buyer in a conversation or talking to you about what they need to do to get their business ready specifically to shop that business out there, how can they reach you and how can they make a connection?
Howard: Well, they're certainly welcome to call me direct at 416-597-4500. Or email me at firstname.lastname@example.org. And I'd be happy to have an initial discussion with them totally in confidence. We have many colleagues throughout North America and within the US in particular who have great depth of experience in various industry verticals ranging from technology, to aerospace, to food and beverage and so on. But also within our organization we can help the business owners to attract the right foreign buyer by having direct access to the senior decision makers within those organizations.
Jeff: Wonderful. Howard Johnson, it's been a delight. I appreciate all the time that you've given us today in shedding some light on some of these key concepts and important information you've shared regarding transaction businesses across borders and overseas, really important stuff. And hopefully we can have you back on again to talk about more of this in-depth.
Howard: I'd welcome that opportunity. Thank you.
Jeff: That's Howard Johnson, managing director of Veracap M&A International, Inc. and president of M&A International.
Deal Talk has been presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. And if you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts like Howard Johnson make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening. We'll talk again soon.