As we approach the conclusion of one of our cross-border transactions, it may be useful for those SME owners considering a sale to an overseas buyer to be mindful of some of the variables, pros and cons inherent in such a process. Whilst on the surface the sale process appears identical – prepare for sale, contact buyers, negotiate, complete – some subtle differences exist that need special highlighting and consideration if the process is to yield an optimal result.
First, let’s consider the advantages of sale to an offshore party. Perhaps the best way to look at this is to understand why overseas buyers pursue transactions in Australia (or whichever country you are based in). Establishing a greenfield operation in another country is a challenging proposition: the legal/regulatory environment is often vastly different, as is the culture, currency and overall business environment. The purchaser’s brand may be widely recognised in its domicile, but has no power in new markets. Acquisition provides a shortcut, a running start, with a lower risk profile than a startup in many scenarios.
So for offshore buyers, the motivation for acquisition is almost always strategic in the SME realm, and is vastly preferable (from their perspective) to a greenfield play. It is an opportunity to quickly and effectively achieve scale in a new market with an established operation producing free cash flow. This level of buyer motivation plays into the hands of a well set up vendor, providing a point of leverage that may not exist in negotiations with local options.
This strategic motivation affects many transaction variables, from pricing (multiples can be pushed higher) and transaction structure, to the post-transaction involvement of the vendor.
There are, however, some distinct disadvantages. The buyer unfamiliar with the local environment is naturally going to be more risk-averse, so when the underlying asset poses too many downsides, negotiations are short-lived. Whilst a local purchaser with a more experienced eye can accept some level of risk in key areas and put structures in place to manage any key person, operational or financial shortcomings, offshore parties take flight at the first sign of trouble.
Time zones, too, offer up some issues. During the sale process itself, the differing locations mean discussions often take place at odd hours. In the case of the transaction we are finalising now, that has meant many 10pm (and later) teleconferences. Information flow can also be lumpy compared with domestic transactions, with time differences adding days to document revisions and requests for information that otherwise would not exist.
The difficulties of cross-border transactions mirror the attraction of circumventing the start-up process in an unfamiliar environment, in that the culture, business norms and regulatory environments of both parties can be at odds. A failure to recognise that these differences exist – or worse still, that one is superior to the other – is a sure fire way to scuttle a potential deal.
So how best take advantage of the cross-border option?
First, understand the types of opportunities that will appeal to offshore buyers and ensure your asset compares favourably. International acquirers more often than not expect a certain level of scale, sustainability, operational excellence, financial health and low-risk proposition, to a greater extent than a domestic equivalent would. Thorough, well-considered preparation is therefore key.
Next, potential vendors have to make it easy as possible for acquirers to do business with them. Provide depth in background industry and sector research, disclose business information with conviction and prepare to be on the phone or Skype in the wee hours of the morning.
Finally, take care in fully understanding the business culture and expectations of the people involved at the other end. Not only will it avoid potential frustration, but also removes much of the guesswork and awkward courting that can eventuate.