by Sheon Karol, Managing Director at The DAK Group

The US middle market is viewed as an attractive and stable market by many foreign investors. Foreign capital has flowed into the US middle market in recent years and we expect continued growth.  U.S. business owners can benefit in a variety of ways from the increased involvement of foreign buyers so it is important for business owners to understand this development and know how to capitalize on the opportunities.

Benefit of foreign buyers to U.S. middle market sellers

The participation of foreign buyers in a sales process certainly drives up the price, but there are other advantages.  Among the reasons to sell is an acceptance that the company needs to be “taken to the next level” or concern that the company is about to face disruption in its sector. Some foreign buyers bring unique capabilities or access to global markets for the selling company. 

In my experience, foreign buyers are also likely to retain a higher percentage of management and employees. Many business owners want to “take money off the table” but do not want to retire.  They still have a passion for the business and feel they have much to contribute.  A business owner recently told me that he does not want to spend every day shopping with his spouse, but he wants to set up trust funds for his wife, children, and grandchildren.  Some foreign owners would welcome the opportunity to retain the services of the seller and may in some circumstance provide for the seller to maintain some equity for a defined period.
Attractive features of the US middle market for foreign buyers

The US middle market offers foreign buyers the opportunity to enter a large market without “betting the farm.”  Also, investors in many countries are eager to diversify their holdings by investing in a politically stable country.

There are valuable opportunities in the US middle market, which The National Center for the Middle Market defined as companies with revenues between $10 million and $1 billion per year.  In the third quarter of 2017, middle market companies showed steady 7% year-over-year revenue growth and 6.4% growth in employment.  In the fourth quarter of 2017, earnings at private, middle-market companies in the U.S. grew at their fastest pace since 2012.

Even if the foreign buyer has a proven concept that has succeeded in its home market, it is time and cost efficient to acquire an established vehicle in the US rather than start from scratch.  Acquisition targets in a multitude of sectors are available: there are approximately 25,000 companies with annual revenues between $100 million and $500 million and around 350,000 firms with annual revenues between $5 million and $100 million. 

We expect the Trump Administration’s tax overhaul and easing of the regulatory burden on US companies to enhance the attractiveness of middle market companies for foreign buyers and increase divestments and acquisition opportunities.

Disruptive change will make the U.S. middle market more attractive to foreign buyers

Disruption is a greater concern in business today than in the past because the pace of innovation has increased.  This makes the U.S. middle market even more attractive to foreign buyers.

Nassim Nicholas Taleb has coined the phrase “antifragility” for entities that not only are resilient but actually improve from shocks.  Bureaucratic and rigid risk-averse systems suffer when they encounter uncertainty and disorder.  In contrast, the U.S. middle market is adaptive and, therefore, not only withstands shock but also benefits from disruption.  Middle market business owners have “skin in the game” – one of the criteria Taleb cites for “antifragility”.  Middle market companies are more nimble than huge bureaucratic institutions and, therefore, can adapt more readily to change.  Sometimes middle market companies lack the expertise and resources that are needed to be adaptive but the foreign buyers may be able to address these deficiencies and enhance the “antifragility” of the acquired company.

Challenges for foreign buyers

Owners and managers desire proximity to supervise their business.  Distance, therefore, is often a concern for foreign buyers.  Also, every country has its mores and characteristics.  What “works” in an overseas market may not necessarily succeed in the US.

The US middle market is opaque, so foreign buyers often do not know whom to approach to find the appropriate target acquisition.  A foreign CEO recently said to me that potential acquirers “do not even know whom to call.”

Advice for foreign buyers who want to come to invest in the US

Foreign buyers should decide at the outset whether they wish to duplicate their formula in the US or whether they want to buy a business that already has a niche and which they can enhance.  They also need to find advisors who are familiar both with their concerns and goals as well as with the US middle market.

Buyers can be very well served by keeping the former owners involved for a period of time.  No one knows their niche as well.

 “Tips” for US middle market business owners:

  • Middle market business owners need to work with advisors who are experienced in cross-border transactions and can access appropriate buyers.  You don’t want to leave money on the table because your advisor doesn’t have the contacts or the requisite knowledge.
  • Build a risk profile for every buyer – foreign and domestic.  There are horror stories of advisors who have failed to consider execution risk, and their clients wait months, and sometimes in vain, for the purchase price.  Model a “risk premium” to weigh the value of bids.
  • Develop in advance a management structure and succession plan that address the foreign buyer’s concern about distance.
  • Be sensitive to foreign fears about the litigious nature of US law and business.  Get ahead of the buyer by detailing any litigation risk and provide a clear litigation strategy
  • Recognize that foreign buyers may have different cultural sensitivities and understandings of negotiation points and etiquette.  Engage advisors who can help you navigate these negotiation subtleties.
  • Determine the value of foreign tax treatment so that you understand, and increase, the value of the acquisition to the foreign buyer.  For example, in certain jurisdictions, the buyer may be able to write off the investment at a rate higher than in the US.
  • Be aware that the importance and prevalence of cross-border transactions will continue to grow.  Take advantage of this trend so that you can maximize your proceeds in the sale and post-sale.

 Sheon Karol is a Managing Director of The DAK Group, a boutique investment bank specializing in middle-market, privately-held companies, advising business owners on sell-side and buyside transactions and financial restructuring. He has extensive experience working with clients both domestically and internationally. To contact Sheon Karol, email:

This article is adapted from an interview with Nora Zou published by Axial at