Business and end-consumers in Europe have an appetite for American products and services, so it’s no surprise that there is an increasing interest among entrepreneurs to grow their businesses by expanding into Europe. Andrew Pike, managing director at AN Valuation Services in the Netherlands, has nearly two decades of investment industry experience as a valuation advisor and provider of M&A and transaction support, in addition to other specialties. He’ll explain how cultural differences from country to country influence the way executives do business there and how expanding your company into European markets might be easier than you think.
“In the United States, the contract is king... in the Netherlands, we've got this concept of implied agreements.”
- Andrew Pike
Jeff: So, you want to expand your business in Europe, just how easy or difficult is it? Do you need a special valuation? If you're looking for answers to these and other questions where doing business in Europe is concerned, you've come to the right place.
From our studio in Southern California, with guest experts from across the country and around the world this is Deal Talk, brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Hello, and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on “Deal Talk,” it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
Let's talk about international trade involving your business and commerce with new clients in Europe as I welcome in Mr. Andrew Pike, managing director at AN Valuations in the Netherlands, a business and intangible asset valuation specialist with 20 years of investment industry experience and more than 13 years of corporate finance and valuation advisory experience including cross border valuation issues.
Andrew Pike, welcome to “Deal Talk,” sir. It's good to have you.
Andrew: Thank you very much, it's good to be here.
“In general, in Europe, people really work to live. Money isn't always the biggest motivator. It's not uncommon to see somebody just stop working because they're a little bit stressed out, take a break, and then come back when they're ready again into either your company or a different company.”
Jeff: Let's talk a little bit about the climate right now in terms of American businesses, those companies looking to expand into other territories, Europe to be specific. What kind of business climate are we looking at right now, favorable business climate? Wait and see kind of what's your perspective?
Andrew: It's a favorable climate. First of all, I'd like to say the economy is really starting to snap back, 2015 was a pretty good year, 2016 is expected to be a little bit better. The economic growth here isn't really as strong as the United States and it's not really expected to catch up to those levels at any point in the near future.
But it's a good place to invest right now because the economy is gaining strength and the European Union, it can go one way or the other but if it improves then you might have some banking integration and so on.
As far as American companies wishing to expand into Europe, in general it's always been very accommodative particularly in Western Europe. It depends on the country. All countries are different and they can really differ dramatically.
And just by way of example you can look at the United States and the Netherlands. United States was the largest foreign investor in the Netherlands by far. It's $645 million. The Netherlands, which is roughly the size of Maryland, is actually the third largest foreign investor in the United States.
Jeff: I've heard that in fact the current appetite for all matter of items that might be manufactured in the United States, the current appetite is indeed very healthy in Europe. A lot of people are interested in having American-made things. Is that in fact true?
Andrew: To an extent... In terms of things like clothing and consumer goods American products are seen as very high quality. German products are also seen as very high quality. But in general there's a good appetite for American products here.
And for a while the U.S. dollar was a bit depressed and that was helping exports from the United States into Europe. Now the Euro currency is starting to get a little bit depressed, so that puts a little bit of pressure against it. But if in terms of quality, if it's between U.S. products and less expensive products from East Asia, for example, then they might veer towards American products.
“The first thing you have to be aware of when you're looking at an acquisition in another country is the tax rates and depreciation regimes.”
Jeff: Andrew, I know that you are a specialist in business valuations and you have an opportunity to explore any number of issues or concerns that may come up with regard to cross-border valuations as are part of any sophisticated, perhaps even uncomplicated M&A transactions that go across borders.
In terms of right now those American businesses are looking to enter European markets what are some of the perhaps common questions or concerns about expanding operations across borders that you often sometimes address. And perhaps address specifically for those American business owners looking to do business overseas?
Andrew: The first one that comes to mind is contract law. In the United States, the contract is king. If you want something done... If you don't have a contract then your deal is worth the paper that it's not written on. In particular in the Netherlands we've got this concept of implied agreements. So if you're starting working together you've got a contract.
And you just have to follow by another one of these things that they have here called the ‘Principle of Reasonableness and Fairness’. It has to be reasonable and fair otherwise you can take the other side to courts and get things forced.
Verbal agreements are binding here. So, if you agree to something and then you start doing something, and you can prove, say by way of email or something, that you've been acting and you've had some discussions, you could win in courts on that.
And also, there's this principle of good intentions. If you actually start down the path of an acquisition and the company that you're talking to has spent all kinds of time, and money, and efforts, looking to get the acquisition done, and then you want to back out --
Well, they can take you to court because under certain circumstances, if they can prove that your intentions weren't good, that you were just trying to get for example information about the company or some other thing perhaps, you put them under a bit of pressure in terms of all these expenses, and fees, and so on. They could, potentially under certain circumstances, force you to actually complete the transaction.
Also, if you have a written contract with somebody and after the fact it seems that there are pieces in there that are not reasonable or fair, you could actually go to court and the judge can literally rip up the contract and enforce rules that the judge thinks are reasonable or fair. That's the Netherlands.
When you look at the United Kingdom for example, they've got a principle that buyer beware more or less that if you go into a contract you have to expect that the other side is trying to get out of the deal everything that they could. It's a completely different way of looking at it. Different countries have different approaches to it but you really should have a good understanding of the contract law in the country that you're looking at hopefully through a legal adviser. Before you go into that...
“That [labor law] can be quite burdensome, and language -- that can also be a difficulty. Not every country in the world speaks English.”
Jeff: No, I'd like you to finish if you would.
Andrew: There's also labor laws. Generally, across Europe, it's very difficult to find people other people. And they have worker's councils and companies which is a board that represents the workers and looks out for worker's interests. And the unions are very strong across the continent, collective labor agreement.
So if you go into a reasonably sized company you probably fall under, as an employee I mean, probably fall under collective labor agreements. And then trying to get by that can be very difficult if you don't want the terms of that.
There's also working culture all across Northern Europe. They've got flat hierarchies. So the president of the company can often be seen having lunch with everybody all the way from the bottom of the reception. And the staff workers all the way up to upper managements.
And then I also think in general in Europe people really work to live. Money isn't always the biggest motivator. It's not uncommon to see somebody just stop working because they're a little bit stressed out, take a break, and then come back when they're ready again into either your company or a different company.
Amongst many other cultural factors, you should understand the culture in the country that you're approaching. So in the Netherlands you go into a meeting and coffee is what you drink at a meeting. And you really should drink the coffee if you can.
On the flip side, you have cold tea. If you're offered cold tea at the meeting, that means that you're pretty much on the black list.
In Northern Europe shows of wealth. You don't want to be showy or flashy… as they’re seen as a bad thing.
And again, going back to the hierarchy within the company and titles, that really, really, really differs from one country to the next. So in the Netherlands you don't want to stick above the crowd. You don't want to seem bigger than everybody else, you want to fit in.
But when you go to France, for example, then titles become something very, very important. And particularly Germany, matters are decided at the top and then filtered to the people at the bottom. In the Netherlands or even Belgium, decisions are oftentimes made at the bottom and then the top is there to advise and consent, if necessary.
“But I have to say aside from these challenges [language difficulty], the US government has been doing a really good job with promoting businesses.”
Jeff: So there's a line of respect that one would have to rise to, and obviously having a title commands that respect is important. But it seems like in so many other areas and particularly in the Netherlands, for example, we're talking about where you are right now as we're speaking, it's a much easier going, a much more of relational or regular man approach to doing business where everybody is on the same level and same wavelength, in a manner of speaking of course.
And it seems very commonsensical too. If I was to take my business to the Netherlands first, let's say for example, and it doesn't matter really what I manufacture, or whether I provide a service.
Would it then be easier for me to begin to move into other areas in Europe, other markets in Europe once I am established there, for example, in the Netherlands, as oppose to moving right into for example Germany?
Let's say I wanted to expand in Germany from where I'm at here in the United States without crossing over into the Netherlands first where it seems like doing business with a verbal contract is pretty easy to do.
Andrew: No, I think you're dead on there. Which country you want to go into really has a lot to do with the strategy, the reason why you're doing the acquisition. If you're a private equity investor, you're going into the acquisition to make money.
And both sides should understand that. But if you're a strategic investor, you're one company acquiring another, maybe you're looking to expand your market position, maybe you're looking to get closer to some clients.
There's a strategic reason which defines which location you're going to be in. But if you're looking to launch a European broad strategy, when I say the Netherlands is the best place to be I'm not saying that because I've been living here for a while.
I say this because the Netherlands has, I think, got the most tax treaties of any country in the world. So you avoid double taxation on the way in and on the way out. So you avoid double taxation repatriating back to the United States and also between the Netherlands and other countries.
They also have this concept of participation exemption, so if you need to sell your company a share deal is tax-free, whereas in lots of other countries that's most certainly not the case, in particular in Europe.
Customs duties, they have special facilities here where basically if you set-up in the Netherlands to import then that's sort of a passport at the Dutch customs duty rates that are applicable across the rest of Europe, and then you can avoid double taxation in that way.
Another thing, strategically located, the Netherlands has the largest container port in Europe, North America, or South America, Rotterdam. It's by far the largest container port. It's got the third largest airport in Europe in terms of cargo traffic, 1.7 million tons, excellent railway network, rivers that flow into Germany, and to Belgium, and to Luxembourg.
Lots of people speak English and they've got special tax advantages for expats. And even special government programs to help expats get settled.
Jeff: It just really seems ideal, Andrew. It really does seem like a dream kind of a situation for American business owners who are looking to kind of expand across boarders and start someplace.
But it certainly could be a place where someone could be a permanently, not just a kind of a point between point A and point B for example, but really a port of entry if you would. And then a great place to be permanently, have that great permanent European presence.
You talk about a lot of advantages there. You're talking about all of the perfect reasons from a financial standpoint and saving money for locating a business for example in the Netherlands. And we're all about that here on “Deal Talk.”
We talk about the importance of improving company values. I'm just wondering, you have had a chance to relate to companies on a global level regardless of where they do business and wherever their home countries are.
If I am looking to expand beyond borders for the first time, does merely moving across the ocean and setting up a location there, do I virtually, automatically elevate the value of my brand and of my company by setting up shop overseas, even if I haven't sold a single widget?
Andrew: Well, that's hard to say. If you haven't sold anything I would say no because 10% above zero is still zero. But I think it's wise, if you're going to expand geographically it's wise to expand close to home.
So if you're in the United States, if you can expand into Canada, or Mexico, or somewhere close by, perhaps the Caribbean or even South America simply because it's easier to control what's going on. There's that physical distance.
If you want to expand into another country, there's a few ways to do this. You could find a local representative to help you expand into another country. You could set-up what we call green field which is just setting up a new office, a sales branch, a branch office, or you can acquire a company.
Now acquiring a company, that's oftentimes the most expensive option but it gives you a lot of control and it really gives you a scalable platform.
The cheapest option is usually finding a local representative. They take a cut off the top of whatever you're selling in the other country, but you're limited by their network and usually they want some kind of exclusivity.
Jeff: There are smart reasons to go about this, smart ways to go about expanding globally, and you just talk about expanding closer to home, and it's always important to I think to find someone who works within a business-friendly environment, in an area where they're welcoming of new businesses obviously and they want to have you there.
And that's just a matter of really taking the time to I think as you put it, getting to know some of the people, representatives, someone who can kind of give you an in so to speak and has some information that they can share.
Jeff: Andrew, we're going to come back. We're going to take a short break, and I'd like to talk to you a little bit about valuations as they relate to cross boarder M&A deals. We'll talk about that a little bit.
We're going to talk about maybe too some misconceptions that business owners may have about doing business across border as well. And there are a lot of people who obviously they found a lot of success doing business in the United States.
They're from here but now they're looking at taking advantage of these new global opportunities. It's a brand new normal that we live in, in this world, and that means doing business across the globe.
My name is Jeff Allen, I'm speaking with Andrew Pike, Managing director at AN Valuations in the Netherlands. And both of us will be right back when Deal Talk continues after this.
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Jeff: I'm Jeff Allen with Andrew Pike, my special guest, Managing director at AN Valuations in the Netherlands. Andrew, we're sometimes told on this program the comprehensive valuations are not always necessary.
For those companies that are looking to doing business with an investor or with a buyer outside of the United States looking to sell their company overseas, is a comprehensive valuation often necessary? I know that's kind of your business but just from your vantage point how often is this sort of thing necessary?
Andrew: It's never really required. For the bigger companies it's very advisable. Deals are often done on the basis of multiples, which can be a high-level valuation approach. That's when one company's acquiring another.
One is private equity or financial investor then they're going to do a more comprehensive valuation usually. The problem with using these multiples is that you can't capture future capex plans, long-term restructuring, or some kind of strategy shift. You can't capture that with multiples.
So you need to get into more detail and do more detailed valuation approaches. If it's a small company, oftentimes, a more detailed valuation isn't going to add much value.
“In the Netherlands ... smaller companies sometimes use this approach called the ‘adjusted present value approach,’ which is isolating the tax shield.”
Jeff: What about differences in terms of methodologies used, is there anything that is different from the way that you might perform a valuation for example of an American company from where you are involved in cross-border transaction then say a company might perform on an American company that is doing business with someone across the street?
Andrew: Almost answering this question, the first thing you have to be aware when you're looking at an acquisition in another country is the tax rates and depreciation regimes, those can really be quite different.
They've also got sometimes different solvency rules and capitalization rules, so might be that the equity of your company cannot drop below a certain level. That's in Spain and Romania for example, you have those rules.
There's some thin cap rules in the Netherlands that are similar to the United States. And in terms of valuation methods we've got this concept of marketability discounts and control premiums. In the UK for example control premiums can be really quite high. And they've got different practices in different countries.
And then in the Netherlands for example smaller companies sometimes use this approach called the ‘adjusted present value approach,’ which is isolating the tax shield. And it's using some existing leverage which can be helpful in some cases, but it's fairly difficult to explain this approach, so it can make matters even more confusing. That’s what you want to stay away from -- when what you're dealing with the transaction is confusion. If you can keep it simple, then I think you're on the right track.
Jeff: Are there any other significant barriers to entry to Europe for American companies that are looking at growing over?
Andrew: For sure labor laws, like I was mentioning previously. That can be quite burdensome, and language -- that can also be a difficulty. Not every country in the world speaks English.
I have done business in Germany and in Italy where in lots of cases I couldn't get by with English. And that can make things challenging. There's other countries that speak quite a bit of English in Northern Europe, for example across Scandinavia most people speak English and in the Netherlands.
So language can be a difficulty. But I have to say aside from these challenges the US government has been doing a really good job with promoting businesses. Like I've got a client Switzerland, a Swiss client, a startup that's looking to expand into the United States. And they've got the US Ambassador to Switzerland personally helping them with introductions and introducing them to people.
And apparently she's been helping a lot of other countries as well. The former US Ambassador from the United States to the Netherlands Timothy Broas. He's been really super active in the business community in particular with companies looking at that transatlantic traffic. So the current administration has been super helpful in terms of promoting US business.
Jeff: Well, I know Andrew too from my experience, having done a little bit of homework prior to our discussion today, that you also are instrumental in doing a lot of your own consultation and working with European businesses for trying to help them gain entry into the US market as well.
Andrew: I did a seminar pretty recently. We had a pretty decent-sized seminar of about a hundred people called Road to USA. And this was a room full of Dutch business people looking to export into the United States.
We set up a nice group of speakers, a lawyer, and a tax advisor, and I got some people from the embassy over there. And we had somebody, a friend of mine who has a company that recently expanded into the United States and was able to tell good stories about that.
I focused a little bit on market entry. So I've been doing the most, I'm part of a group that is involved in this US Government program called Select USA. This is a group that works... was set up by the US Embassy and I was part of the Dutch delegation to the Select USA seminar two years ago in Washington, D.C.
So I do my best to try and get out there and talk to businesses that want to go one way or the other, either into Europe or the other way around.
Jeff: Any misconceptions, Andrew, that you can share with us that American business owners may have, maybe these are people that you've advised that have about either valuations as they may relate to cross border M&A transactions or about the M&A climate, or doing business across borders in general terms?
Anything you can tell us at all about any misconceptions about taking business overseas into Europe?
Andrew: There might be a conception there's high barriers to entry, that it's difficult to set up over here. It really isn't. The US Embassy has teams of people who can introduce you to whatever companies that you want to be introduced to and corporate finance advisors also, very instrumental in introducing companies to other companies.
You get some legal advice, some tax advice. Make sure you have a good strategy and you’re well on your way.
Jeff: Well, on that note, and it was a positive note, I'd like to go ahead and wrap right here by, Andrew, having you tell us how we can reach you.
If we have any questions about perhaps taking our business overseas, maybe finding any information you could provide that could help us with some key decisions as we move forward, whether that be three years from now or 23 years from now, how can we reach you?
Andrew: Sure. Firstly, you can always call my US number, is 617-958-1943. My number in the Netherlands is country code 31702210058. And I can also be reached by email at firstname.lastname@example.org. And if anybody wants to find out more about the company, www.anvaluations.com.
Jeff: And really, you do business really throughout all of Europe, or much of it don't you?
Andrew: I've got clients across the continent. In the past I've done work with companies in Africa, in Central Asia, United States, Canada. I've been around.
Jeff: You've been around. Andrew Pike, again, I want to thank you so much for taking the time out of your evening there in the Netherlands and as we speak, and kind of giving us some sense of current business climate and really a better idea of how easy it actually can in fact be to talk about at least getting started on a conversation about doing business, across border business in general terms.
And I'd like to think that we can have you back on again in the future. I know that we could probably carry this conversation into a couple of different direction.
I want to thank you so much again for your time.
Andrew: Pleasure was mine. Thank you very much.
Jeff: It's Mr. Andrew Pike, Managing director at AN Valuations in the Netherlands. My name is Jeff Allen and I hope that you tell a friend about this program. In addition to morganandwestfield.com you can find us on iTunes, Stitcher, and Libsyn.
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“Deal Talk” has been brought to you Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Thanks again for listening. We'll talk to you again soon.
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