Cross-Border: Preparing for a Deal with a Foreign Buyer or Investor

What if someone in Canada, Mexico or overseas was interested in buying your business?  Would there be any difference in the way the transaction would be carried out?Would there even be an advantage in selling your company to a foreign buyer?  The landscape has changed, and with so much interest from international investors in American businesses, it’s important to understand the motivation of the buyers and some of the things that make global mergers and acquisitions unique. Joining us with his expert perspective on this topic is Mr. Drew Dorweiler, CPA and Certified Valuation Analyst with over 30 years of global corporate experience.

Questions Answered For You

Life is changing quite a bit and we're happy to detail the reasons why but for me it remains an extremely attractive environment to do business.

- Drew Stuart Dorweiler

Key Takeaways

  • Dealing with different languages, different cultures and mindsets often makes the post-acquisition integration process even more complicated.
  • The Chinese are extremely eager to invest in North American targets. Economic growth is still robust enough over there, and funds are available.
  • Asian purchasers are looking at acquiring brands and intangible assets and technologies. In evaluating these, they're often very much top line revenue oriented.
  • Synergies are achieved by combining the acquired business or intangible assets or technologies with existing operations. If you're doing that, most certainly you're going to be achieving a lot of cost savings.

Read Full Interview


Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're looking to sell your company now or at some point in the future it's our mission to provide information and advice from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value. 

In this growing global economy many small businesses are taking advantage of the international market. You probably have, and it works both ways with many businesses overseas are also taking an interest in what's going on here in America, and that includes an interest in acquiring American businesses. If you're an American-based business and you were approached by a foreign company with an offer that seemed too good to pass up, you had to consider it, would you be prepared to move forward with the deal? What's involved? My guest on this segment is an expert in this area. His name is Drew Dorweiler and he's managing partner at Dartmouth Partners Ltd. Drew Dorweiler welcome to Deal Talk, it's good to have you sir.

Drew: I very much appreciate your invitation Jeff, thank you.

 

Jeff: Drew, you are somebody that we kind of sought out because you have extensive depth of experience. Tell us a little bit about yourself, where you've been, and how you've gotten to where you are now.

Drew: Certainly, Jeff. Actually I graduated Bachelor's Economics from Dartmouth College, NYU, Pace University MBAs, I have two MBAs. And then I moved in 1989 to Montreal and I've been practicing ever since in business valuation, litigation support, mergers and acquisitions, and corporate finance. Founded my own firm, Dartmouth Partners, Ltd. and we're based in Montreal with an office in Chicago, Illinois as well. And soon to be, and I know we're going to be getting into this, opening an office by the end of 2015 in Hong Kong.

 

Jeff: Very exciting indeed, and you obviously have a lot on your plate and are very busy so we just appreciate the fact that you're sharing a slice of your day. What I kind of be interested in knowing first and foremost, the process for a cross border M&A deal, let's say involving Canada and the United States. Is it really much different from an all-domestic transaction - and you've been involved in domestic transactions both in Canada and then here in the United States. Tell me how those types of deals are different? Are they pretty much the same, simpler, more difficult, more involved?

Drew: There are differences. Starting from initially, again, in any sort of cross border transaction, whether or not you're working buy side, sell side, the fact distance, possibly a very different culture. There might be additional complexities in terms of one party identifying another in a potential transaction. And in fact this is one area that myself and my team we have in the past I think successfully attempted to benefit from or exploit is the fact that because we do have knowledge and networks in the US and Canada and we've developed in Asia. Basically parties in each of these countries acting on their own who would like to transact in terms of buying and selling businesses and business interests across borders, they generally don't know who to turn to, where to look. Again, because we have really three geographic networks we're able to draw on all three networks and that really broadens. Again, if you’re in buy side, sell side you're a population of potential interested counter parties.

 There are differences. Starting from initially, again, in any sort of cross border transaction, whether or not you're working buy side, sell side, the fact distance, possibly a very different culture. 

Jeff: And so that's fantastic and that you've got a number of prospective buyers out there that you haven't even really tapped into. If you're a business owner and you're giving it some thought, and obviously you're maybe entertaining offers that are domestic as well. What about deals involving companies overseas much farther away, thousands of miles. You touched on Asia a little bit there and we'll be talking more about that later on in the program here. But when you're talking about dealing with for example companies based in Europe that are looking at acquiring an American-based company, are there some real complications perhaps that could come up, or things that could actually create ... I'm not going to say complications but just a lot more work on everybody's part to kind of pull this deal together. 

Drew: There are certain complications when crossing any border. Even in North America between Canada and the US, because all of a sudden now you have to deal with two sets of, let's say legal regulatory environments, certainly the taxation regimes are bound to be very different. It's certainly, and again, there could be linguistic, cultural differences that may be very surprising. And this is also posed during the transaction process and then even afterward. We all know that in deals even if it's a purely domestic deal there often are difficulties in integrating the two businesses that may have joined together and merged. Again, if we're dealing with different languages, different cultures and mindsets, it often makes the post-acquisition integration process even more complicated.

 

Jeff: You've got about 30 years of financial and transactional experience. Is there anything in particular that you look for, Drew, in preparing your valuation of the company for sale that you might not otherwise focus on for domestic deal valuation? And if you could just kind of elaborate on that.

Drew: If you're working sell side, it's identifying potential buyers who ... We call that valuation special purchasers or special interest purchasers, really those that can benefit from synergies, from economies of scale, strategic advantages. And often we're seeing these ... We talked about control premiums or transaction premiums, and again in businesses with respect to M&A. But special interest purchasers they typically won't pay merely a control premium. They can pay even significantly higher prices because they want to benefit from these, again, strategic benefits.

 if we're dealing with different languages, different cultures and mindsets, it often makes the post-acquisition integration process even more complicated.

Jeff: If a business owner has received interest from a company overseas. Let's say it's a European company, maybe a company based in Germany for example interested in acquiring an American-based company, Drew. What should he or she do first? I'm talking about the sell side.

Drew: If it's a North American business interested in selling to a German purchaser?

 

Jeff: Yes.

Drew: Well, again, they would have to consult someone such as myself or one of my competitors who has familiarity with the German market to try to identify a range of potentially interested purchasers again with particular emphasis on identifying those that would be able to achieve the strategic benefits and synergies that I mentioned. But then once you've identified these purchasers, again, it's really important to get someone with particular experience in that, say in this case, Germany, that speak the language that understands how Germans do business. I had nothing to do with this transaction but I know the whole Daimler-Chrysler merger from several years ago. I think that's about a decade or so ago. I've heard quite a bit reported that that really didn't integrate so well largely because of differences in how Germans do business versus Americans.

 

Jeff: But you bring up an interesting point though. And that point is that I'm taking away is that if you are interested in doing business overseas and that is when I say doing business, selling your company prospectively to a European based buyer, and it doesn't even matter whether you're based in Europe, or Asia, or South America, cross borders that you want to do business with, a consultant, a business broker who has some international transactional experience. And if you can find one who deals specifically with those countries of interest, you're going to want to deal with people who speak essentially the language and knows how business overseas works. I think that's the key consideration here. Let me ask you this, what is the M&A market like right now in terms of the climate and the interest level from potential overseas buyers of North American companies, and US based businesses specifically? Where is most of the interest coming from?

Drew: Well again, I think Jeff that's from what I've observed, continental Europe, it's really dried up. Just the financial conditions are such over there that they need everything they can ... Of course generally speaking but they need all the resources they get just keeping things moving along back home. That's why again, during the last four years I've turned my focus to Asia which is that's a fascinating dynamic market. We've all seen the headlines in the last 12 months or so, seeing how China's cooling off, China’s cooling off. But when you look in a comparative basis they had a good 15-20 years of double digit annual growth and now they're cooling off depending on what you read or whom you believe five percent to seven percent which is still far above North American and European growth. So their cooling off is still quite dynamic and it's a very exciting place to do business. And specific to M&A, Asian buyers looking at North American targets, they're very keen. They remain extremely keen to purchase North American companies. That's a number of reasons. Again, branding is extremely important again to Asian investors and US and Canadian companies are perceived by them as having some of the top brands in the world and reputations. There are also immigration programs, certainly the possibility of obtaining a green card through the US, you know, business investment programs, that's very, very attractive. And also as well based on the recent, again, the last six months or so conditions in the Chinese financial markets with respect to their currency being devalued and volatile, the stock market volatility more than ever, we've witnessed trends. They want to get their money and their funds and liquidity out of China, and again invest in somewhere comparatively robust and stable which is the US and Canada.

Again, branding is extremely important again to Asian investors and US and Canadian companies are perceived by them as having some of the top brands in the world and reputations.

Jeff: Let me ask you a question, Drew, that came up. I was kind of listening to I think a business report on NPR recently and they talked about - and this is something that isn't necessarily new but it's something that they brought up and I thought I’d just kind of mention this to you on the program here. They said you cannot exactly always trust the information that comes out of China with respect to their business growth because the assumption is that their GDP growth is probably actually more like half of what they actually state, and then there are others who believe that, no, it's probably actually true in fact with they're reporting. Where do you stand on that? Obviously you're relocating or locating into a new office in Hong Kong. Again, we can go into that in a minute. But where do you stand on that? Is growth still, is attractive to you in terms of GDP growth over there and the future of business, and business in general, the economic climate?

Drew: I'm glad you brought that up, Jeff, that's a great question. First of all whether or not ... I don't know the answer and I'm not being facetious. I feel the only people know the answer to that are the Chinese Communist Party. I certainly don't know. But it’s actually all quite irrelevant, because again, whether it's five percent or seven percent or three, the fact remains that it's still robust enough, the growth is still robust enough over there, and funds are certainly available. The Chinese are extremely eager to invest in North American targets. So that's really all I care about. It certainly isn't gloom and doom there. Life is changing quite a bit and we're happy to detail the reasons why but for me it remains an extremely attractive environment to do business. And in terms of mistrust it's funny I've heard countless times ... In North America people are saying, "I don't want to do business with the Chinese" and so on and so forth. I think a lot of lessons have been learned. Sure, you might not want to joint venture in terms of license and technology because there's a high chance that's going to be stolen. But if you're sell side, you want to sell your business or your technology, go right ahead, you're going to be receiving cash for it as long as you properly structure your transaction so that you're basically getting cash up front and the full price, and everyone's happy. So that works very well. I also might add that, again, having done business with the other side, they are to be fair, the Chinese are just as mistrustful of us because they don't know ... Again, there's the language barriers, culture barriers. They don't know and certainly in North America and particular in the US when they perceive rightly or wrongly is many Americans are hostile to China, who do we trust? Are the Americans going to rip us off? They think we're ignorant, recent peasants that have come in to all this money and we're just going to spend it blindly. They have a real reluctance to deal with us so it's a very much of a two-sided issue.

 

Jeff: It's an interesting point, an interesting study of cultural biases and differences, but those types of differences exist all over the world and we know too that the economy has always got these cycles and every country is the same way. They're going to be economic cycles that show extreme, rapid growth, and then you see those down swings. And either way as long as the economy and the way that capitalism works, is given the chance to work, things are always going to even out and always produce what looks like really positive incomes, or outcomes I should say, in the long run. Drew Dorweiler is my guest and he is an expert in M&A transactions across borders, overseas, domestically. And he is the managing partner of Dartmouth Partners Ltd., and I'm going to continue my conversation with Drew when Deal Talk resumes after this.


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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest Drew Dorweiler, managing partner at Dartmouth Partners Ltd. and we're discussing business acquisitions that involve American based companies and those based overseas. If you're an American based small business owner and you're considering maybe doing business with an overseas suitor. You're looking to get out, you're getting ready to use that exit strategy that you have in place, and you've got some people that are taking a look at your organization and you're thinking about moving forward with a prospective buyer from overseas. You're listening to the right program. We're giving you some food for thought today, and Drew we're pleased again that you've taken time out of your schedule to join us. What is the most important thing to overseas buyers, investors, Drew, when evaluating a company to buy? Is it EBDTA, is it cash flow, is it a combination of things, is it something else? Just kind of let us know based on your expertise.

Drew: Certainly Jeff, and again, as with valuing any business, even in the US the answer to this varies depending on the type of business, the precise metric. I think it's fairly global by now, sophisticated purchasers are focused on cash flow for most businesses. I'll say that's the most commonly focused on valuation metric. However, again, I'm seeing in particular, because Asian purchasers they're largely what are they looking at now, they're looking at acquiring brands and intangible assets and technologies. In evaluating these they're often very much top line revenue oriented. So I'd say this is a metric I deal with quite a bit and in particular because given my previous comments as to the importance of special interest purchasers who are looking for those synergies, and so on and so forth. Some of the synergies are achieved by combining the acquired business or intangible assets or technologies with your own existing operations. So if you're doing that most certainly you're going to be achieving a lot of cost savings, expense reductions on your P&L. Again, you're focusing most directly on is that additional incremental revenues. Again, I would say revenues are also very, very important. 

Again, there's the language barriers, culture barriers.

Jeff: Is there any way that a business owner can make his company even more attractive or ... I guess put another way, how can a business owner really prepare for his company's ultimate sale to a foreign investor, buyer? You work alongside so many business owners in the past and I don't know both public and private but let's stick with the low to mid-level, million dollars to 50 million in revenue businesses. What can they do best prepare their company for sale to a foreign buyer?

 

Drew: A few points come to mind here, Jeff. One of the things is unlike ... I see a lot in North America. We have quite a few, let's say hurried sales. For whatever reason a decision might be made. "Hey, we need to get rid of our business in the next quarter or two” and very rash decisions are made, which I think are often unfortunate. In seeking a potential foreign purchaser, it's all the more important to really have a longer horizon in making this decision, again, largely because you need to be identifying who these foreign purchasers are. And again, to successfully do that you need to hire a transaction advisor, business broker, valuation expert, and that's going to take time to find that expert with the appropriate expertise in the foreign market. And secondly, for this expert to perform their work, to locate and identify those potential purchasers that would make sense. And again, given some of the additional considerations that you don't see with a purely domestic transaction such as obtaining advice on both sides of the borders from your appropriate professionals, lawyers, and tax experts, and so on and so forth. And then even the negotiation process which may, again, take a little longer and be that much more detailed due to differences in cultural awareness or just the different cultures. Again, this can all really take additional months or quarters in order to ensure that a successful transaction occurs. 

And in fact, one thing I'll add with respect to Asia, Asians are renowned for, and I can tell you first hand they will take much longer to transact than a European or a North American business or business owner will. Because they just move incrementally slow because they first want to ... Because it's a whole different way of doing business. They want to make sure that they can actually trust the individual, and that you develop a personal relationship ... It's kind of funny, even if you're selling your business and you won’t any ongoing relationship whatsoever. That's how they work. There are going to be a series of meetings. It could be four, five, six meetings, and you cover the same distance as you will in one or two meetings with a more, let's say, efficient North American or European purchaser. But any attempts to push it and hurry things, and do it, let's say our way, you'll be met with resistance and almost a guaranteed fail in terms of concluding a transaction.

 

Jeff: Talking about doing business in Asia and with Asian business buyers, investors, and you're going to take your company and you're going to expand it. You're opening an office I think you said in Hong Kong. Tell us about this move and why you're doing it. Obviously, you're very optimistic, you’re bullish on China but why now, why at this time are you going over?

Drew: Because I think that, certainly I'd say the past 20, 25 years we've envisioned many Americans and Canadians crossing the ocean. Now that China has opened up considerably they're present there, they're doing business. But I find that really outbound from China, from Asia I should say because it's not all about China, into North America, that direction is only just beginning. And again, because I think that we're seeing just a combination of factors. The market is still comparatively ... The economy is still comparatively active in Asia versus North America. And the fact that there is the will, the funds certainly exist and there's a keen interest on behalf of the many, many wonderful Chinese business people who do want to invest over in the US and Canada, the time is right. Why Hong Kong? Again, especially those that have never done business in Asia, Hong Kong is the perfect portal to do business, especially in China. And this is a very, very well-traveled road. Hong Kong being a former British colony, everyone speaks English so there's no linguistic ... or much of a cultural issue versus if you go to China, that's extremely different. There's a rule, the financial system in Hong Kong is extremely well-developed, banks, investment banks, stock markets, they all thrive there. And also there's a rule of law, so a lot of companies, you'll get a lot of Hong Kong companies acting as intermediaries in transactions just because it's a common law basis whereas the Chinese legal system, fortunately I’ve not encountered it, I hope not to, but I’ve just heard massive warnings about that in terms of corruption and unreliability ... If you're a foreigner and something goes wrong, and you're trying to sue a Chinese business person especially with contacts ... Let's face it, to be successful in China, operating a business, you must have contacts with the government. If you're going up against them, just forget it. Again, you're bound to fail.

 And then even the negotiation process which may, again, take a little longer and be that much more detailed due to differences in cultural awareness or just the different cultures. Again, this can all really take additional months or quarters in order to ensure that a successful transaction occurs. 

Jeff: Obviously, Hong Kong of course, very Western-oriented, westernized, so it's much easier to do business there. And really, a great location to be in just to kind of be in that proximity to that region of the world where right now it seems that growth just continues to be ripe and the timing is really perfect. Drew Dorweiler, I really appreciate your being here today and thank you so much for your time. If someone is interested in getting in touch with you because you have some experience and the level of expertise that many people might be looking for in terms of helping them to understand and evaluate their business, and provide valuation services and also brokerage types of services and other types of arrangements to work with those overseas investors and potential overseas buyers for businesses here, how can they reach you?

Drew: The best way, I invite all contacts to reach me by personal email or my mobile phone. Personal email, it's my name drewdorweiler@gmail.com. And my phone is 514-962-6896. And again, I'm always available, often travelling overseas so that's why I prefer contacting me in person as you're bound to get me.

 

Jeff: Drew, again, I really do appreciate the time. Great having you on board and hopefully we'll have you back on again on Deal Talk in the future.

Drew: Okay. It was my distinct pleasure, Jeff, thank you very much.

 

Jeff: Drew Dorweiler, managing partner of Dartmouth Partners Ltd. has been my guest today. 

Deal Talk has been presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield today at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts like Drew Dorweiler, make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening and we'll talk to you again soon.