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The Chinese Investment Alternative

A New Buyer for Small and Medium Businesses

David Iwinski Jr.

Managing Director

david.iwinski@bluewatergrowth.com.

AUTHOR

David-Iwinski-Jr.png

David Iwinski Jr.

Managing Director

Blue Water Growth

david.iwinski@bluewatergrowth.com

US Mobile: +1 412 352 7997

China Mobile: +86 183 2128 4064

Skype ID: david.iwinski.bluewatergrowth

The Chinese Investment Alternative

A New Buyer for Small and Medium Businesses

By David Iwinski

 

In 2013, Susan Endersbe, President and Owner of R. E. Uptegraff in the town of Scottdale, Pennsylvania, was looking for a buyer for her business. Established in 1926, R.E. Uptegraff is a well-known and respected manufacturer of transformers for utility and the industrial markets. The business was sound, with an excellent reputation for quality products and innovative designs. It had been a family business for three generations, but now it was time to find a new owner.

 

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. They look for strong brands, distribution, local manufacturing and capable leadership and 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. While they are tough negotiators, Chinese firms often desire a cash transaction than the multi-year earn-out models so often preferred by domestic buyers. For U.S. businesses, it may be worth thinking about opening up the investor pool to include Chinese buyers. If so, they should consider the following:

 

Take the long view for greatest value.  China buyers are methodical and careful and prefer to build relationships first. Only after they have established trust will they undertake a thorough analysis of the deal. The Chinese go slowly due to an earnest desire to understand the transaction to make a prudent decision. Any smart investor would do the same.

 

Don’t just search in well-known Chinese cities. Many people expect that buyers will be clustered in 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 companies eager to invest in US operations.

 

Business fit is important; cultural fit is critical. 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 some experience with global business.

 

Chinese buyers will need assistance to learn about US business practices. The Chinese buyer will often 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 an important part of the process.

 

What happened with R. E. Uptegraff? 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, all while keeping a long-term commitment to the City of Scottdale. 

 

China firms won’t always be the answer to investors looking to exit but in the near future they may often be the best option for the business owner, the employees and the local community. 

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