Susan Endersbe, President and Owner of R E Uptegraff, had a problem. Her business needed a buyer and there were few on the horizon. Established in 1926, R.E. Uptegraff manufactures transformers for the utility market and the industrial market.
The business was solid, with an excellent reputation for quality products and innovative designs. It had always been family owned, but now the time had come to find a new owner to carry on the business and create opportunity in the town of Scottdale, Pennsylvania.
The problem was that after 2 years of looking, the offers made by domestic buyers were well under her price expectations. Because of the economic downturn, most companies in the transformer business were producing under capacity and had little incentive to acquire more domestic operations. Some were worried about Uptegraff’s unionized workforce. Furthermore, most potential buyers intended to shutter the facility and move it away from Scottdale, simply looking to pick up the loyal Uptegraff customers and leave the factory and workers behind. Susan wanted a buyer who would pay a fair price and stay in town to grow the operation.
At this point, Susan contacted Blue Water Growth, a Pittsburgh-based global merger and acquisition consulting firm, to discuss the idea of finding a buyer from China. Chinese firms are extremely interested in purchasing small and medium businesses in the United States, and they are often willing to pay a higher price than domestic buyers. From July through September 2014, Chinese firms spent $3.1 billion on overseas foreign direct investments (OFDI) in the United States. According to research done by the Rhodium Group, these growth patterns will continue, due to significant reforms to China’s international investment policy.
While domestic buyers often focus on consolidating plants and gaining additional market share, firms from China typically have broader objectives. Their valuation model takes into account growing the plant facilities, capitalizing on brand equity, obtaining initial market access and developing established distribution channels. Further, while they are tough negotiators, Chinese firms are often more interested in a cash transaction than the multi-year earn-out models so often desired by U.S. buyers.
For small or mid-sized U.S. businesses that have had trouble finding the right domestic buyer, it may be worth thinking about opening up the investor pool to include international buyers, particularly from China. If so, they should consider the following insights:
Be patient. China buyers are deliberate and careful. They like to build relationships first. Only after they have established trust will they undertake meticulous analysis to be sure they understand the deal. At times, it may be frustrating because the buyer may ask the same questions several times. But be patient. Typically, the Chinese are going slowly because of a sincere desire to completely understand the deal in order to make a prudent decision. Any smart investor would do the same.
Cast a wide net. Many people expect that likely buyers will be clustered in large cities like Shanghai or Beijing, but there are more than 170 cities in China with populations over 1 million and these cities are home to thousands of healthy companies eager to invest in US operations.
Focus on a good business and cultural fit. When deciding on a potential buyer, consider not only complementary product lines, similar production methods and quality measures, but the culture of the buying firm. The best candidates are those who have had a taste of global business and have learned tolerance and adaptation. Those who have never ventured outside China can still be good buyers but will need more coaching on American management processes and practices.
Understand that Chinese buyers may not be familiar with US business practices. The Chinese buyer will have done most of its business under a system in which the government is often a guide and partner in business. They may have some apprehension about dealing with US regulations. They will also have heard many horror stories about legal and tax complexities that may give them pause. Guiding the buyers to competent advisors they can engage independently is a big part of the process. In this way, the seller can help the buyer to understand the process, rather than the more adversarial system in place for most domestic transactions.
The R E Uptegraff story has a happy ending. On September 30, Blue Water Growth announced that Shenda Electric of Jiangshan, China had acquired R. E. Uptegraff Manufacturing Company. Shenda Electric has plans to expand both the physical plant and jobs over the next 4 years, as all while keeping a long-term commitment to the City of Scottdale.
It won’t always be fast and easy but with commitment and focus, the route to a China buyer may just be the very best decision for the business owner, the employees and the local community.
David Iwinski Jr. is the Managing Director of Blue Water Growth, a global business consulting firm with extensive on-the-ground experience and expertise in Asia. Its services include merger and acquisition guidance, private capital solutions, product distribution, production outsourcing, and a wide variety of business advisory services for its Western and Asian clients. He can be reached at firstname.lastname@example.org.