We get a lot of calls from business owners who say that a broker has told them that foreign buyers are willing to buy their businesses for truly astounding prices. These alleged “buyers” are usually located in Europe or Asia and just dying to buy American businesses.
Here’s the flaw in the logic. Usually when a buyer purchases a business they continue to operate it in the same way that it had been operated. That means that if your business generates profits in dollars now, it will continue to generate profits in dollars after the sale – the same cheap dollars. When those profits are converted back into Euros or Yen, the exchange rate that worked for them during the purchase reduces their return. So, unless the buyer is betting that the dollar will soon rebound a cheap dollar doesn’t help raise their rate of return.
Next time I’ll talk about other reasons that an overseas buyer might purchase a U.S. firm and how those scenarios affect the price.