China Chit Chat Issue 18

Selling the China Dream – Part 1 – Challenges

Greetings from Shanghai! People seem a little dispirited, but I sense things are getting better. Will comment on this in the next post.

One feature of the decimation of expats in China (and I do mean decimation as I think roughly 90% have fully or partially left) is that there are many more Western expats considering the sale of their businesses. Although such sales have been happening for years there does seem to be many more disposals in recent months. This first part will deal with the common challenges these expats face. The second part of which will be in the next issue will focus on strategic planning and trying not to get screwed over.

Recap New Company Law

But before – a quick recap on the New PRC Company Law – I got it all wrong!  It is not a snorefest … No, once you know of its existence you should not be able to sleep. A suitably scared US client passed me an article their domestic US law firm had published (nay unleashed) which breathlessly proclaimed:

“Failure to file Company Law-compliant documentation before the end of 2024 will, until remedied, bar foreign-invested enterprises from processing other filings of any kind with the local company registration authority.”

“Companies that fail to meet the deadline will be publicly shamed by the relevant authorities.”

Yes in a time of real estate defaults, purges of corruption and falling birth rates the number one red button issue that Chinese authorities and media will leap on is a company that has not updated its Articles of Association to consider an audit committee.

“delay is risky business”

But never fear the law firm which is located exclusively in two land locked USA states are able to:

“offer FIE update services on a flat fee, [US law firm] has contracted with a leading alternative legal services provider that specializes in China cross-border investment tools.”

I for one was very disappointed they did not claim to have an AI robot involved. The China cross border investment tools are probably some Chinese interns.  

Perhaps most ominously:

“If you have operations in China and were waiting for a sign, this is it—the time to act is now.”

Stop screwing around and get on with it guys!

“But wait … there’s more. If you order now you will also get this exclusive set of Swiss made steak knives – that would be at home in the finest Michelin star restaurant”*

* ok I made that last one up 

American lawyers … I really have so, so much to learn from them. I love them. If you do not believe this article exists I think you can cut and past some of the quotes and find it by google.

Selling the Chinese Dream – Expat Version

Most of my expat friends have sold off their real estate over the last few years. Selling a house you and your family have lived in for a defining period of your life is wrenching. But most were comforted by the windfall and getting the cash offshore.

Much more challenging is selling a business in which you have invested your lifeblood and passion for a long time. There is a combination of guilt (selling and leaving the employees behind) and fear (will those employees, the buyer, bank, authorities screw me over on the way out).

No entrepreneur I have met so far seems happy about the prospect – compounding this is that most are not so young (sorry guys – if I know you and you fall in this category and you are reading this then rest assured I did not mean you – I consider you to be very young) so this sale also impacts their future financial security.

The Challenges

The seller really needs to think in detail about what they want and weigh up differences but also think about how things will turn out for your specific business (i.e. special challenges or leverage or weaknesses you may have).

The common challenges with such sales are 1) certainty of obtaining purchase price overseas; 2) dealing with potential Chinese buyers and selecting the right one; 3) dealing with the transition (i.e. period in which you remain a minority shareholder and still be employed by the target); and 4) securing that the second sale (i.e. the minority shareholding) is secured in respect of timing, certainty and value.

Another challenge is to run the project quickly and smoothly. For almost all entrepreneurs selling a company in China is a new experience. It is common and sensible to be apprehensive and cautious, but a slow process is not in your interest as the seller.

Accordingly, to optimize the process you need to: 1) have a clear strategy, 2) understand what is possible, 3) have game played in your head all possible scenarios, 4) have a trusted group of advisors, 5) everyone is well briefed about your business and interests, and 6) carefully select the buyer (this is NOT just the highest price but also integrity and capability to implement).

Preparation is not just key to minimize risk, but you will be in a far better position to move quickly and make quick decisions. It is far better to spend more time up front in understanding likely issues and preparing solutions than reacting as the transaction proceeds. Once the process is up and running and delays increase the risk of the project being derailed or the buyer attempting to renegotiate certain elements (i.e. generally seeking price reductions). Also such process can damage your business as the longer it goes on the greater the likelihood of employees and competitors finding out and causing other issues.

As outlined above you will have a number of critical issues for you to address. It is important to ensure you have a clear understanding of what your red lines are and these are clearly communicated at the initial stages – they are likely to be 1) valuation; 2) certainty of payment (i.e. we have a variety of options including offshore funds, escrow, letter of credit etc. – these will depend on the case but also what is feasible to be negotiated); 3) your role in the transitional management including KPIs; and 4) certainty, timing and valuation of the eventual sale of the minority stake.  There are many other important issues such as warranties, connected transactions, key employees etc. but not all issues can be addressed in the letter of intent. If you and your advisors are well prepared for these issues then it is easier to come to a timely agreement on key points and avoid contracts going back and forth.

That’s all for this issue.

In the next issue we will touch on how the expats often get screwed on the way out – and discuss how the risk of this can be minimized but unfortunately not excluded.

We will be doing a webinar on Wednesday, 27 March 2024 - 9:00am -10:00 (London Time ) / 10:00 -11:00 (Berlin Time) / 17:00pm -18:00 (Beijing Time) / 20:00 -21:00 (Sydney Time) on this niche topic – please register at https://qywx.wjx.cn/vm/e4hde1S.aspx

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