Exit options and considerations for South Asian-American businesses
By Paul Puri
The growth of minority-owned businesses in the United States has been nothing short of remarkable, and firms owned by South Asians are among the fastest growing — providing substantial wealth creation in cities across the nation.
While the West Coast and the Northeast have been well-known for entrepreneurial activity by Asian-Americans and South Asian immigrants, the growth is no longer limited to the coasts. A Biz2Credit business diversity analysis last year found that Houston was among the cities with a growing mix of East Asian and South Asian businesses, and Plano, a city north of Dallas, has a significant population.
Merger & acquisition of U.S. business entities run by South Asian immigrants or by American-born business leaders with South Asian ethnicity can involve cultural and business organizational issues that should be considered in the buying and selling process. As a result, business owners looking for an exit option should carefully consider an M&A business consultant or investment bank qualified to address the unique needs of such transactions, which can include assessing the impact of culture and generational issues, the business structure, and negotiating styles.
M&A deals involving these firms will be an increasing likelihood as their presence and influence rises. There are an estimated 8 million minority-owned firms in the U.S.— a 38% increase between 2007 and 2012, according to the U.S. Commerce Department’s Minority Business Development Agency, and about 2 million of those are owned by Asian-Americans and Pacific Islanders. The U.S. Census Bureau projects the Asian-American population will reach 25.7 million by 2019, outnumbering U.S. Hispanics by 2055, according to Census Bureau forecasts.
Potential buyers and sellers should consider the following concerning these transactions:
Generational differences will necessitate that some of these businesses be sold outside the family, as American-born children may aspire to career paths far different from their parents. The parents may have labored in blue-collar manufacturing pursuits, import/export businesses, and the hospitality/retail sector, while the children may be pursuing careers in the medical, technology, or financial sectors.
Company ownership structures
Family members, however, may want a sale structured to allow their children to remain as minority shareholders but without involvement in day-to-day operations. In addition, because many South Asian immigrants use a hands-on approach in their businesses, it may be necessary for a new owner to retain the existing owners in a consultant capacity for a significant period of time to ensure a smooth transfer.
Small to midsized South Asian-American businesses of $60 million or less in annual revenue may be built on trusted relationships rather than firm, written contracts. However, if an owner plans to sell the business, these oral agreements will need to be solidified into written contracts to avoid becoming problematic. An investment bank with familiarity with these cultural differences can help a company begin to make these adjustments before they are in a position of needing or wanting to sell.
Minority ownership structures
These businesses may also be set up as local, state or federally certified minority businesses for the purposes of qualifying for governmental or private contracts. If the business isn’t being sold to another minority group then future business with current clients of the company could be at risk if the owners are unable to transfer the minority certifications to the new ownership.
An investment bank with knowledge of minority certifications and the structure of minority ownership among the owner’s extended family will be something that will need to be addressed.
At Capital Alliance Corp., CAC Managing Director Shanali “Shawn” Bhagat and I are well-positioned to address immigrant and minority-owned business transactions. Shawn, a successful serial entrepreneur in the downstream transport, logistics, and wholesale petroleum sector, has sold several businesses in Texas, while my background includes experience in a wide-range of complicated M&A transactions. In addition, Capital Alliance’s long-term alliance with Oaklins, a worldwide mid-market M&A adviser with 60 offices in 40 countries, adds international expertise and availability for transactions involving foreign buyers or sellers.
Some of these nuanced business issues discussed above may not be obvious to M&A investment banks and consultants unfamiliar with the culture and internal organizational structures of South Asian/Asian-American business entities that are interested in exit options. Having the right investment bank that can consult with the business and prepare them for all aspects of an exit is foundational to a successful ownership transition.
Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors.