A Foreign Buyer for Your Business?

The low value of the dollar on international markets makes some U.S. acquisitions a bargain. Here's how to determine which type of buyer to target

I own a paving company with annual sales under $1 million. Our equipment is valued at just under $200,000, we have very little competition, and we could easily double our revenue with better marketing. After 27 years, I'm ready to sell. Could I get a better price for my company if I attract an international buyer?

—R.M., Salem, N.H.

Generally, companies sell for the value of their tangible assets, plus an intangible factor referred to as "good will," i.e., the longtime relationships, customer service standards, client database, community reputation, and other positive attributes that have made the company successful over the years. Since yours is a bid-based business, it is unlikely to have a significant "good will" value, says John Bates, a business broker with Avalon Advisors.

Bates checked a database of actual selling prices and found, of 215 contractor businesses sold, the average actual selling price was approximately 41% of annual sales. "You only state that your annual sales are less than $1 million, but based on the industry average it would require sales of $500,000 in order for you to recover the cost of your equipment," Bates says. "Another benchmark is that a company's average selling price is 2.01 times its pre-tax, true net profit."

Two Categories of Buyer

That said, however, he notes sometimes business brokers tend to price companies lower than the market will bear. "Get a professional business appraisal and tax advice before you decide to put your company on the market," he suggests. "This will give you peace of mind and an edge to negotiate the best possible price."

In terms of international buyers, the current low value of the dollar on international markets does make some U.S. acquisitions a bargain. "Both local and international buyers would need to assess how your business and local market fit into their strategy," says Sanjyot Dunung, author of Straight Talk About Starting and Growing Your Own Business (McGraw-Hill, 2005).

Just as with domestic buyers, there are basically two categories of international buyers: strategic and financial, he notes. "Strategic buyers—as the name suggests—want to determine if there is a strategic fit with your business, products, market, and distribution," Dunung says. "A financial buyer is more interested in getting a good deal and rolling up or integrating several complementary businesses, often with the intent of selling a combined and more valuable entity. Usually, although not always, strategic buyers will pay more for a business as they often have a value for distribution and sales channels for their products and services. Financial buyers usually focus on the amount of cash flow a business generates and their valuation is based primarily on this factor."

A Good Business Broker

If you are concentrating on strategic buyers, you may want to look at the manufacturers of your supplies and equipment, some of which may be international. A company with an interest in ongoing sales to your company and market may be a potential buyer. You may also want to assess whether you have a sales or distribution channel that would be complementary to a specific type of company.

A good business broker (BusinessWeek.com, 7/7/06) will take all these factors into account when helping you decide where and how to market your business.

As you consider which countries may offer potential buyers, take a look at the country's economy, the strength of its currency, and the general business sentiment (BusinessWeek.com, 6/27/07) in that country, Dunung advises.

Other Options: Employees and Competitors

"For example, in the 1990s many people underestimated the potential strength of Chinese and Indian companies and their subsequent appetite for overseas acquisitions, often as a way for them to secure distribution for their goods and services," he says. "However, most international firms are likely to be tough negotiators and hence it's important for you to understand the strength of their currency and local market."

The difficulty for your firm will be finding a foreign buyer that needs a company based in New Hampshire, Bates says. For that reason, don't forget to consider existing employees (BusinessWeek.com, 1/8/07) who may be interested in owning their own businesses or competitors who may be interested in acquiring your firm. And certainly don't neglect improving your marketing now, particularly if you feel that could easily improve both revenues and profits. "Selling a business takes time, and while you are in the process, adding value to the business is always worthwhile," Dunung says.

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