M&A Series: selling a company in China for foreign entrepreneurs, the structure pitfall
Selling a company is something that should always be prepared. This is probably even more true in China where strict rules apply and structuration will also impact your exit price.
During the past 15 years, entrepreneurs started their business from nothing and have now companies’ worth tens of millions of US Dollars. At this time, many entrepreneurs were more focused on sales and cash flow than company structure. When the opportunity of selling will present, their uneven company structure can cost them their exit without noticing it, simply because a buyer will not take risk with unclean structure or potential legal problem. Best case scenario, the buyer will lower the acquisition price to be able to cover these costs.
Several risks should be monitored and under control:
- The Valuation
Valuation can vary significantly based on the structure of the deal. A company owned in China by a physical person should follow some rules of administrative control, which in most cases will go through an asset-audit based on the regulator demand. These processes will make the selling process longer and more costly which can be very annoying for both buying and selling parties. Consequently, it will lower the value of companies that provide services and where their employees, clients and brand are their main assets.
- The fiscal impact
Each type of structure of related companies has different outcomes in term of fiscal impact so it is important to check if the current structure makes sense at a tax level for the entrepreneurs and especially the future buyer. If it is too costly for the buyer, it can be a decisive reason for a deal not to be concluded, and the entrepreneur will have wasted a lot of time and efforts for basically nothing.
- Difficulty of acquisition
Some structures are easier to handle from a buyer point of view. It should not be neglected that investors are people that often have a minimum of time to maximize their profit. This is why it is vital to bear in mind that the acquisition process must be fast and smooth. In order to make it that way, sellers must have a whole range of documents organized and ready to be inspected. But one of the first condition for a successful sale is the legal structure of the target company. Making sure it is well-structured, legally compliant, but also checking intra group operations as well as transfer pricing policy used will be key factors that could very well decide the buyer into purchasing a company or not.
If you are in a path to prepare of sell your activity, be aware of these and seek advice from a professional who can prepare your exit strategy with you. Please also refer to our previous article on the 5 common mistakes future sellers can learn from.
