Do you want to exit your business and you are considering selling to the Chinese? If YES, here are 17 tips on how to sell your business to Chinese investors.
The world is currently a global village, and entrepreneurs are starting to look at the global scene when conducting their business. International investors, including those from China, are currently looking for investments that would enable them take advantage of under-valued assets in the United States.
It is on record that in 2016, Chinese firms spent $103 billion on acquisition of foreign firms, not just in the U.S. alone; and in 2009, Chinese companies invested billions of dollars acquiring significant percentages of shares of energy companies, such as The AES Corp., Chesapeake Energy, and Oil & Gas Assets. This goes to show that China has been making waves in the United States business scene and has been buying up businesses for the past decade.
Thousands of American jobs would have been lost without foreign takeovers of U.S. companies, and according to a report published by the Foreign Investment Review Board (FIRB), China is the fastest growing source of business investors.
Manufacturing businesses are one sector that interests the Chinese a lot especially if it involves something that can be made in China to reduce costs, or represents an emerging market in China (increase revenues). If you want to sell your business, and you think the business makes sense for the Chinese market, you can as well sell it to a Chinese investor. Here is how you can go about it.
17 Tips on How to Sell your Business Overseas to Chinese Investors
Before thinking of selling your business, a lot of modalities have to be put in place for the sale to be successful. They include;
1. Appraise your business
The very first thing to do when you want to sell your business to a Chinese investor is to appraise the business. You need to engage the services of a professional appraiser to assess the market value of your business. This would help you negotiate a fair deal when the time comes. Without appraising your business, you may literally give away the business thinking you made a fair deal.
Depending on the expert, and your business, an appraisal can cost as little as a few hundred dollars, or much more. You should look at comparable businesses’ asking prices on business-for-sale websites to know how much you can pay for an appraisal.
2. Hire a business broker
There are professionals that can help you sell your business to investors, and they are business brokers. If you are going to use their services, it is best that you ensure that they have the experience to sell whatever business type you have.
You need to take a look at their record, ask questions and more. An example of question that you can ask is the number of businesses they have sold, specifically those that are like your own. You should equally find out their success rate.
These are essential things you need to do to ensure that you are dealing with a reliable person. To know more about them, feel free to go to their website. This is where you can learn more about the company or the business broker.
It is best to wait for the broker to tell you what they think the worth of your business is rather than giving that information to them. The professional ones are very capable of identifying this. They will also show you comparable evidence to prove this along with the explanation of the why’s and how’s.
You will know it is time to look for other business brokers if they are not able to. If you are going to hire a business broker, you will need to ensure that they are genuine.
3. Spread out
Many entrepreneurs in the United States that want to sell their businesses are unfamiliar with the universe of Chinese players. There are chances that there may be some serious, well-funded prospective bidders that you’ve never even heard of.
In order to bridge this gap, you have to reach out to a wide range of potential bidders in China; you may be surprised by who emerges as an interested and credible buyer. This is why you need to conduct extensive publicity.
4. Set your price
When you have had your business properly appraised, you can now set an asking price for it. You have to note that the price you set would have to keep some variables in mind apart from the appraised value of the business, but that does not mean that your asking price would be astronomical.
Some business owners mistakenly assume that overseas investors are willing to pay two or three times more than the business’ value. This is simply untrue. A successful investor with millions of cash didn’t get to that position by throwing money away. Astronomical sales figures are reserved for the residential property market.
You can pick an asking price by looking at listings of comparable businesses. If they are asking 2.2 times cash flow (discretionary earnings) on average, you can ask 2.2 times your cash flow. You need to ask your accountant for help in determining what your cash flow is.
5. Get a professional team together
If you are serious about selling your business to a Chinese investor, you will need the services of an accountant, lawyer, and an appraiser. The professional team will guide you through complicated rules and regulations, and would also make sure you get great value for your sale.
You should note that after you account for professional fees, marketing, contracts, lease changeovers and commissions, about 10 – 15% of the sale price will be eaten up. So you need to prepare for this eventuality.
6. Give it time
Another thing you will need when selling to a foreign investor is time. You need to be patient and wait for the best deals. It would not do to just jump at the first deal that comes your way. When you are waiting, you need to make efforts to avoid silent listings.
Silent listings are used to procure genuine buyers, often via word of mouth and through professional networks. The business is advertised without identifying features. This sales method tends to be successful for high profit businesses. For a regular small business, it pays to have a visible marketing strategy.
7. Get the word out
When a foreign investor hears about your business, you can guarantee they will use Google to investigate everything they can. You would do the same too. A simple search will reveal most things about your business. One way to strengthen your business’ credibility is to have your business mentioned in newspapers and trade press abroad. A locally engaged PR agency can help spread the word with reputable news outlets in your target location.
8. Keep your business functional while you wait
Assuming all goes well, the overseas investor will put in an offer. They will want to walk into a business that runs like a well-oiled machine. It is your job to make it easy for them. With all of this attention focused on finding a buyer, don’t let your business slide. The deal could go south along with declining revenue, thus ruining your business. So, you must never neglect your business until you hand over the reins.
9. Prepare your staff for the change
Remember that most overseas investors won’t stick around much to run the business. They will expect the staff to stay on and continue with the business basics while they work on setting up their own management team. In order to ensure you do not disappoint your buyers, you have to start the change by informing your staff about your decision to sell off the business.
They may not need to know every detail of the sale, but you have to treat them with respect and assure them that their interests would be protected under the new management. You should also ensure that you make plans with the new buyers to protect the interest of your staff.
10. Keep your records intact
With any type of sale you have to prepare records for buyers to look at. Have a few years of tax statements and cash flow records for them at a minimum. The more useful information you provide, the easier it is for the investor to sign the dotted line. With luck, hard work and a supportive team of professional advisors, the business sale will be a win-win for seller and buyer alike.
11. Bridge the language gap
Language may be a great barrier when you want to sell your business to the Chinese. To help out in this regard, you need to translate key documents – Teasers, Information Memoranda, Management Presentations, perhaps even selected VDD materials – into Mandarin.
If your business employs native Chinese speakers, be sure to involve them in your deal team as well; they will likely have a key role to play not only in the transaction, but also in any subsequent PMI work.
12. Be mindful of cultural differences
In designing your sale process, avoid setting key milestones around early October (National Holiday) and late January/early February (Chinese New Year). Scheduling management meetings and site visits may require longer lead times and greater flexibility to accommodate the Chinese bid team’s visa applications. This is generally getting easier, but can still present a headache when juggling multiple bidders on a tight timeline.
13. Vet the buyers
You need to vet the businesses that have shown interest in buying your business. To assess a buyer’s financial capacity to buy the business, brokers typically have the buyer fill out a buyer profile. This profile would enable them ascertain the capacity of the buyer to make sure that they can afford to buy and run your business.
14. Sign a Confidentiality Agreement
Before a seller shares profit and loss statements and other confidential details with a buyer, the buyer typically signs a confidentiality agreement (simultaneously with completing the buyer profile). You can get a good confidentiality agreement for free online, or your broker can draw this up if you are using a business broker.
15. Schedule Appointments
When things start getting interesting, buyers would want to meet the seller in person. You can schedule an appointment for your buyers to come over, or you can make the move to see them. It is also acceptable to make use of video calls till such a time when the travelling of one party cannot be put off anymore.
16. Follow up
Just as in any B2B sales exercise, one sometimes must follow up with buyers to move them along in the process. You can do this by keeping the channel of communication open, and by providing safe documents on request.
17. Negotiate
The buyer will present the seller with one or more agreements necessary to complete the sale. Most of the terms of these agreements will be easily understood by a broker. The broker can help you negotiate these terms and help you broker a deal that would suit you perfectly.
Consider Visa Requirements
It is not possible to talk of selling a business in the United States to a Chinese investor without considering visa requirements. The federal government has two visa programs for foreign nationals, like the Chinese, who are interested in buying a business in the United States. The visa programs are the E-2 and the EB-5 Visas.
i. E-2 Visa
is a non-immigrant, long-term, temporary visa, issued to a person who makes a substantial investment in an enterprise that is active and that the foreign buyer will direct and manage. There are, however, certain percentage requirements. For example, a business costing less than $100,000 requires an investment of at least 75 percent; a business selling for between $100,000 and $500,000 requires a minimum investment of 60 percent.
An additional requirement is that the investor must be legally committed to the purchase of a business by paying the deposit–even before the E-2 Visa has been approved.
To avoid incurring substantial liability should the application be denied, the business broker handling the sale will usually recommend an escrow closing, wherein the deposit is paid into a special account and turned over to the seller only upon issuance of the visa.
Chinese buyers are eligible to apply for the E-2 Visa, and the visa will be issued for a period of three to five years, renewable without limitation as long as the investment is intact.
ii. EB-5 Visas
U.S. Citizenship and Immigration Services (USCIS) administers the Immigrant Investor Program, also known as “EB-5”. It was created by Congress in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. All EB-5 investors must invest in a new commercial enterprise.
Commercial enterprise means any for-profit activity formed for the ongoing conduct of lawful business including, but not limited to: A sole proprietorship, Partnership (whether limited or general), Holding company, Joint venture, Corporation, Business trust or other entity, which may be publicly or privately owned.
More commonly known as a Permanent Residency Visa, this type is issued to a non-national who invests at least $1 million in a newly-created or newly-organized U.S. business enterprise that creates or protects ten or more jobs.
The required investment for the Employment Creation Visa can be reduced to $500,000 if the investment is made in a rural or “targeted employment” area. This visa is issued for a period of two years on a conditional basis, to be made permanent upon proof at the end of this time that the investment has been completed and the employment level has been met.