Screening Non-U.S. Citizen Buyers

Is it possible to sell your business to a buyer who is not a U.S. citizen? 

Selling your business to a non-U.S. citizen is both possible and common. But there are caveats. 

The United States is a talent magnet for innovative entrepreneurs from around the world, and U.S. immigration laws are designed to attract skilled entrepreneurs from other countries, which ultimately boosts our economy in the long run. This benefits the U.S. by increasing the pool of skilled labor and attracting those who have a demonstrated track record of successful entrepreneurship in other countries. This results in a broad and diverse array of entrepreneurs and a constant influx of new ideas, products, services, and other technological innovations. It’s a win-win for both the U.S. economy and the buyer.

One of the most common pathways to gain U.S. citizenship is through the purchase of a business. A non-U.S. citizen buyer also has the option of obtaining U.S. citizenship by starting a business, though the majority feel that acquiring an existing business is a safer bet. Passive investments, such as real estate or businesses in which the owner is not required to play an active role, do not meet the requirements for obtaining a long-term visa to the U.S.

Here are the pertinent questions when it comes to dealing with buyers who are non-U.S. citizens:

• Do non-U.S. citizens make good buyers?
• What types of businesses do non-U.S. citizens like to buy?
• Is the process of selling a business different if you are selling to a non-U.S. citizen?
• What countries offer the E-2 visa?
• What are the requirements for an E-2 visa?
• How should you negotiate with a non-U.S. citizen buyer? Is the negotiating strategy different from negotiating with another buyer?
• Is selling to a non-U.S. citizen worth the hassle?

Each of these topics is addressed in the section that follows. 

Why Non-U.S. Citizens Make Good Buyers

Non-U.S. citizens make good buyers for two primary reasons, both of which mitigate risk to you, the seller:

• U.S. immigration laws require a high degree of capitalization, or down payment, normally at least 50% to 60% of the price of the business.
• The visa status of a buyer who is a non-U.S. citizen is contingent on the ongoing success of the business. As a result, they are more apt to persevere during difficult times to avoid losing their visa and having to return home. This is beneficial to you if you are financing a portion of the sale.

Due to the requirement that the business remains operational to ensure their visa remains active, non-U.S. citizen buyers are more risk-averse than domestic buyers. Imagine you move to South Korea – would you feel confident assessing demographic, socioeconomic, and other factors and creating a new strategy for the business? Most likely not, unless you’re already familiar with the industry and the local marketplace. Buyers who are non-U.S. citizens feel the same aversion to risk when assessing a business in the United States.

Every marketplace has subtle nuances that can only be understood by developing a thorough understanding of the various elements that make up the marketplace and the industry. These elements include demographics, psychographics, consumer preferences, competitive landscape, political landscape, and dozens of other factors. These factors are difficult for any outsider to fully understand. 

As a result of this lack of knowledge, non-U.S. citizen buyers purchasing a business are more risk-averse than their domestic counterparts. Most buyers are looking for a low-risk business that has a high chance of survival.

The exception to this rule is if no change in strategy is necessary for the business and the business only needs an investment in new capital for equipment, inventory, or working capital. In this case, a non-U.S. citizen buyer might not view this investment in capital as risky.

To some intermediaries, this aversion to risk may be misinterpreted as if the individual is looking for a guarantee. But, keep in mind that if the buyer fails in their new business, they can lose their visa status and their entire investment. Because their visa status depends on the continued operation of the business, they have a stronger motivation to succeed and persevere during difficult times. As a result, buyers who are non-U.S. citizens are much more cautious, and you should consider their need to maintain a conservative strategy when communicating and negotiating during the sales process.

The investment required to obtain a visa is significant, and the chances are high that the individual is astute and experienced, and therefore in a position to gauge the riskiness of an investment. At the same time, point out to the buyer that there are no guarantees and risk is present in any investment. The buyer should be able to develop a healthy perspective toward risk and seek to mitigate risk, but should also possess the strength to ultimately take the plunge. The ideal non-U.S. citizen buyer is a serial entrepreneur who has owned multiple businesses before. Such an individual will be comfortable with managing risk and will be capable of taking the plunge.

Selling your business to a non-U.S. citizen buyer is both possible and common. But there are special considerations you will need to keep in mind.

The E-2 Visa

The primary visa obtained in connection with the acquisition of a business is the E-2 visa. The United States has signed a reciprocal treaty of friendship, commerce, and navigation with dozens of countries. It’s possible for the buyer from such a country to become a U.S. citizen through several pathways. 

For further information about the E-2 visa, including a list of the U.S. Department of State’s Treaty Countries, go to the U.S. Citizenship and Immigration Services website for details. www.uscis.gov/working-in-the-united-states/temporary-workers/e-2-treaty-investors

Here is how the U.S. Citizenship and Immigration Services summarizes the description of the definition and requirements for an E-2 Visa from the U.S. Citizenship and Immigration Services:

“The E-2 nonimmigrant classification allows a national of a treaty country to be admitted to the United States when investing a substantial amount of capital in a U.S. business. Treaty investors (E-2) must invest a substantial amount of money and direct the operations of an enterprise they have invested in, or are actively investing in.

“To qualify for E-2 classification, you must:

• Be a national of a country the United States maintains a treaty of commerce and navigation with;
• Have invested, or are actively in the process of investing, a substantial amount of capital in a bona fide enterprise in the United States; and
• Be seeking to enter the United States solely to develop and direct the investment enterprise.”

E-2 Visa Requirements

There is no fixed formula that determines how much capital is required to qualify for an E-2 visa. Rather, a test of proportionality, or a relative test, is used. The amount of capital invested is considered relative to the value of the business as a percentage of the down payment. Required down payments might range from 50% to 90% for small businesses to as low as 10% to 20% for larger businesses. For example, a $5 million investment might suffice, regardless of the value of the business. The absolute minimum amount of cash that will generally suffice starts at $100,000. 

Exceptions may be made if the business is highly specialized and the investor possesses unique skills.

• Non-U.S. Citizen Buyers Must Invest Their Own Funds: Loans suffice as long as the assets of the business being acquired aren’t collateralized by the loan.
• Develop and Direct: The non-U.S. citizen buyer must own at least 50% of the equity in the business being acquired, and must have an active role in the management and operation of the business. Passive investments do not meet the criteria for an E-2 visa.

It is also understood that the business must have a history of generating a large-enough profit to provide the investor with a means of living. The business must also provide employment for other U.S. citizens. If the business will employ only the non-U.S. citizen and a few additional employees, it’s unlikely to qualify. The more people the business employs, the less weight may be given to the other factors. In other words, if the business employs 100 people, then a lower down payment may be required.

The purpose of the requirements above is to ensure that the non-U.S. citizen buyer is committed to the continued operation of the business. The factors are considered collectively, and there are no hard and fast rules.

Key Points

Here are some tips when dealing with a buyer whose purchase is contingent on them obtaining a visa:

• If you’re negotiating with multiple parties, don’t entertain offers from non-U.S. citizen buyers unless the offer is significantly more attractive than other offers. This is due to the extended time frames and potential risk of the foreign buyer not being granted a visa.
• The U.S. immigration process is time-consuming and difficult, and the buyer will likely have the help of an attorney to navigate the process. You can discuss questions regarding the time frame and other factors you should consider with both the buyer and their immigration attorney. 
• Non-U.S. citizen buyers share the same characteristics as domestic buyers – the desire to earn a living and a return on their investment. Bear in mind the buyer’s dual objectives of maximizing opportunity and minimizing risk when positioning your business to them. Focus especially on why your business is more stable than other businesses and specific methods that can be taken to reduce risk, such as eliminating fixed costs or reducing working capital requirements.
• Be prepared for delays and the requirement to use escrow. Your funds will be released once the visa is issued, but be prepared for numerous delays for the foreign buyer to obtain their visa.
• The liquidity requirements usually outweigh the disadvantages, inconvenience, and extended time frame involved with selling to a foreign buyer. This may not be the case though if you are negotiating with multiple buyers and the foreign buyer’s offer is no more attractive than other offers.

Selling a business is a complicated matter, and the balance of power is critical throughout the transaction.