Get our 5-step action plan for building a successful operational review process and program to maintain traction on enterprise initiatives.
The Surprising Truth About International Expansion: Key Findings from the Field
If your business had a viable means to enjoy a greater financial upside, it would be an endeavor worth considering, right? It’s surprising, then, how many business leaders hastily dismiss the idea of opening an office in another country. Many perceive the pursuit to be too daunting, too complex. But in reality, international expansion could very well be your ticket to greater revenue and incremental profits – particularly if your business has shed its startup status to become an established, revenue-generating entity. Based on the many years I’ve spent helping businesses grow beyond U.S. borders, there’s good news: it’s not as daunting – or as costly – as you might think. And ruling out the notion altogether means you could actually be leaving money on the table. In this blog, I’ll discuss how, with the right planning and foresight, you can lay the groundwork for successful expansion.
Where First? Establish Your Gateway and Chart Your Course
Where you go will obviously vary depending on the products or services you sell and the industry you’re in. Generally speaking, many organizations choose Western Europe (in particular, the United Kingdom) as their first point for expansion. This eliminates many barriers due to the common language, similar rules of law, and large markets with like demand. It’s after acquiring a foothold in the U.K. that those companies will evaluate further expansion into Western Europe and/or Asia. During this phase, thorough market research will ultimately determine your path, including whether or not it makes sense to open individual regional offices. Companies that have locations and employees in Germany and France, for instance, have a considerable advantage as consumers in those countries are more inclined to buy from local companies versus one located elsewhere.
Next: Set Up and Root Down
After deciding where to go, there are a number of “chores” required from your company in order to conduct business in foreign markets. These can be divided into three main steps: the initial creation of your foreign entity, the selection of a regional bank, and the appointment of key resources.
1. Create a Foreign Legal Entity
This first critical task is not particularly costly, nor is it difficult to complete. It starts with finding a corporate secretarial services company, who will be instrumental in helping you maintain a global overview and manage your corporate obligations. Here are some specific services that this type of company will provide:
- Advise your business on the necessary paperwork that needs to be filed to incorporate; then prepare that paperwork on your behalf.
- Open up legal entities for you anywhere in the world, helping to ensure that, as time goes on, all your necessary legal paper work is filed each year.
- Provide other services that you may desire including services for payroll, accounting, and tax filings.
How and when do you find a secretarial services company? I would recommend starting this process about 12 months in advance. For many, this first step starts with a simple Internet search. Be sure you select a firm that has an outstanding reputation with references to prove it, and think about the following:
- Do you anticipate future expansions? If so, it’s best to consider a company that operates in several different countries versus specific regions.
- Do they provide additional services (including the ones mentioned above)? It’s best to analyze upfront the types of services you are looking for – then compare the costs of those services across a few different options.
- What are the costs and fees? Inquire about the one-time setup fee for incorporating your business in the desired country. Also inquire about the ongoing annual maintenance fee that will be required to keep you in compliance with annual filing laws and other required paperwork.
2. Select a Regional Bank
Having a bank that’s experienced in performing international and foreign currency transactions is vital to your growing entity. It’s important to recognize that your business may have changed significantly from those early-stage growth years when a local or regional bank served your initial needs. As you expand, there’s a good chance you’ll want to seek out a larger bank with more sophisticated services. To help you decide, here are some questions to ask your current bank:
- Do you have banking operations in the country/countries that are being targeted for expansion?
- Do you offer bank accounts in foreign currencies and allow foreign wire transaction processing?
- What are the fees associated with international transactions (for example, converting currencies or processing transactions)?
A few caveats to keep in mind… Many local U.S. banks lay claim to having services or partner banks in foreign countries. While this may be true, it’s always best to perform additional due diligence to ensure that those capabilities truly meet your standards. Some companies will cite feeling that those capabilities were overstated to them – and they end up switching to larger global banks. It’s also smart to look for global banks with regional branches that serve as your U.S. home base, making it easier and more accessible to conduct business in markets that you’re not physically in.
Related Posts
3. Establish the Right Relationships
Once you’re set up, how do you find employers? And ensure tax compliance? Here are some of the relationships you’ll need to establish to help you along:
Select an auditor and tax services provider. Whatever country you incorporate, there will be deferring annual tax and financial reporting requirements, commonly referred to as statutory filling requirements. Hiring an external audit firm is a useful step that can help you navigate this process. Similar to the bank-selection process mentioned above, many early-stage companies will outgrow their local CPA firm, finding them unfit to provide expertise in foreign-expansion markets. For that reason, they find that firms within the Big 4 or other large national firms can best provide the assistance needed in local foreign market filing and statutory reporting processes. Here are some other key considerations:
- When considering which audit and tax firm to use, be sure you negotiate based on capabilities and fees.
- Try to consolidate. Typically, one firm will provide your audit, tax, and filing services. Ideally that will be the same firm as your U.S. firm, as the cost of employing two firms (one U.S. and one foreign) is too costly and inefficient.
- Ensure the tax firm will help you with VAT tax and other local tax calculations (depending upon what country you are incorporated in) and that they’ll keep the necessary paperwork and files as needed on your behalf.
- Consider using your corporate secretarial services company. Many of them will provide these same services, so weigh your options to see if that makes sense for you. Personally, I have found that a good audit and tax firm is usually the best choice.
Find a reputable employment firm and labor attorney. To find employees, I would suggest leveraging a local employment agency to help recruit and identify the best-fit talent for your foreign office. Not sure where to start? Identify recruiting firms that cater specifically to U.S. businesses expanding overseas, then narrow it down with some simple online research. Ultimately, you want a reputable firm with a long track record and positive reviews from businesses in the same industry as yours. Many of the secretarial and audit/tax firms can provide you with good leads on local recruiting firms. Also ask your audit/tax firm for recommendations on a good labor lawyer. Every foreign market has different employment laws – for example, some countries such as England have mandatory pension withholdings and filing requirements. A local labor attorney can be a valuable resource in helping you navigate those local laws and requirements.
Summing International Expansion All Up
With the right partnerships and proper support, the idea of international expansion will start to take shape — and before too long, you can start reaping the benefits of overseas expansion. Keep in mind, 8020 Consulting offers Interim CFO services to help you along. From helping you strategize which geographic markets to pursue, to bridging relationships with service providers, to project managing details large and small, 8020 Consulting has the capabilities and global expertise to guide you through each of these steps and handle any challenges that arise.
You can also learn more in our whitepaper focused on opening up an international sales office to get a better sense of the strategies involved in international expansion:
About the Author
John is an Alumnus of Arthur Andersen and a CPA with over 25 years of diverse, hands-on financial and operational leadership experience in entertainment, technology, retail and distribution environments, including CFO, VP of Finance, and Controllership roles at companies ranging in size from early start-up through middle market as well as Fortune 500. John also has strong international management experience with time spent in the UK, Germany, India, and the Middle East. In fact, he managed global operations teams including the formation and expansion of India offshore operations and expansion of a company into the European market. Across his career, John has worked very closely with VC firms in the raising of multiple rounds of financing and negotiation of lines of credit with banks and he has helped lead companies through the successful exit / sale process.
Lessons from High-Growth Companies: Tips from the Finance Consulting Trenches
For most companies, the periods of greatest growth are also the periods of greatest risk. Even well-funded startups don’t often survive, and those that do rarely make it to the threshold revenues that allow them to thrive in the long run.
Some of these businesses lack compelling business models and products, while others fail to effectively reach niche target markets. For the most part, however, obstacles to sustainable growth are common across all industries.
From poor planning to a lack of human resources to inadequate cash flow management, these problems plague almost every successful company at some point. The difference between those that fail and those that flourish is how they address them. Here are a few of the most important lessons we’ve learned from high-growth companies, including the several that we and our colleagues have built together.
Planning for Material and Human Resources
Ideally, infrastructure and development will always be ahead of revenue – but that’s rarely the case for fast-growing companies. As a firm grows, a lack of in-house resources can make it all but impossible for employees to properly service clients. And, even when money isn’t a constraint, the time of executives and key personnel always is.
To avoid this bottleneck, companies must plan for both material and human resources well before they run short. For the most part, materials are easier to plan: provide enough physical space, computer hardware and software licenses for a growing group of employees. Exact requirements are tough to determine, but erring on the high side is a safe bet when revenues are already rising.
The real difficulty is securing sufficient personnel. There’s always a lag associated with hiring (and firing), and it may take six months or more to onboard and train new employees. Earlier-stage companies typically have higher turnover or failure rates on hiring because the requirements of the roles are less well defined and evolve rapidly, managers may be inexperienced at hiring these roles or levels, and the environments can be extremely demanding. In the meantime, clients will have to wait, and growth can quickly come to a halt, or worse. Growth is exciting, and few companies have the discipline to slow expansion when demand continues to ramp up. An adverse mismatch between capacity/capabilities and customer demands often leads to errors, deteriorating customer service response, declining customer satisfaction, and in a socially networked world, can rapidly destroy brand, reputation and the company’s future. There are a plethora of options to address these growth and transition phases as they relate to people issues – consulting firms, interim financial management services and the like can be an on demand source of individuals who have operated on and in high growth companies in virtually any technical, sales or creative capacity. Accessing these types of firms can be an effective palliative to employee burnout while giving companies the time to execute a thoughtful hiring process.
As the saying goes: hire in haste, repent at leisure.
Employing People with Financial Skillsets
A particularly pressing and most often insufficiently attended area relates to finance and accounting roles. High-growth companies are often populated by entrepreneurial engineers, marketers, and creatives whose experience and interests do not include the design and implementation of scalable accounting and financial infrastructure. Management time and financial resources are most often focused on driving product development and revenue growth, which drive valuations and market share. As companies scale and secure successive financing rounds, at some point, often after a C round raise, implementation of a truly scalable accounting system as well as associated reporting and controls often becomes the most urgent and important priority, because the lack of these becomes a barrier to future financings (both debt and equity), and can create immense issues with respect to day to day processing of transactions. Our view is that the best time to build out scalable financial planning and analysis infrastructure, which is a foundation for a stable sustainable enterprise, is before the house is built or at least before a too large or too complex business is built on an unstable foundation.
Setting Up Viable Financial Systems
Organizations need to have infrastructure that provides not just for the company’s current size, but for its projected growth. Companies with nine-figure revenues all too often rely on QuickBooks for their accounting operations, and migrating to more sophisticated financial systems becomes far more difficult as revenue increases.
This change is better accomplished late than never, of course, but companies should begin implementing new technologies as soon as they reach eight-figure valuations. A scalable ERP takes months to put into place, and implementation will require at least some of a finance team’s attention that at too large an enterprise scale will be urgently required to keep the company running.
Creating Long-Term Cash Flow Forecasts
As a grizzled advisor to one of our companies once told me, the number one rule in business is never run out of cash. The costs of building a new business can quickly drain available funds, and without additional financing, a delay in income can wipe a company out. The best solution to that problem is to create a detailed, continually updated 13-week cash flow forecast as a minimum. One-, two- and three-year flow projections are also useful, not only to stay head of and plan for financings before they become urgent, but also to help manage organizational stress associated with negative cashflow. Companies burn cash when they launch; it’s a lot less disconcerting when leadership can refract actuals through a plan or forecast.
Learn More
8020 Consulting was specifically designed to attract and retain the top quartile of talent in the market, offering all the benefits of consulting while eliminating many of the drawbacks present in other firms. Our Team deploys focus, objectivity and superior academic and professional credentials, backed by a business model that encourages and rewards individual initiative and creativity. When our Consultants deploy, it’s under a mandate to leave Clients provably better at the end of the engagement.
Learn more about our services in our services sheet:
About the Author
David Lewis has been the CEO or founding partner of 5 companies, including a 600-person family business, three successful startups and a venture capital-backed software development firm. His last startup scaled to a 300-person consulting and executive services firm, which served companies ranging from Fortune 500 firms to venture-backed startups. David has deep functional expertise in the creation and implementation of accountability systems, planning, finance, talent acquisition and executive coaching. David is currently the CEO of 8020 Consulting, which applies its team’s intellectual capital, technical expertise and energy to address a range of financial projects for clients ranging from Fortune 50 companies to middle market and venture-backed firms.
When Not to Hire
“Hire in haste, repent at leisure” or “be slow to hire and quick to fire”: this wisdom on hiring is often ignored by companies when they lose a key finance team member. The immediate reflex is to contact internal and external recruiting resources with the objective of identifying a replacement immediately. This is a mistake, and it virtually always comes with a substantial cost that is invisible to executives.
The Problem With Rapid Replacements
The world, and every industry we know that has a future, is changing at a rapid and accelerating rate. So are the reporting and analytical needs of every company. And so are the available tools with which to do the work. So the position description for a newly vacated role should have evolved significantly since the last incumbent was hired. Failing to capture this evolution through an intentional recalibration process is a disservice to the company and anyone who gets hired into the role.
- What if the workload of a position that previously required 50 hours a week to complete can be reduced to 15 through the application of available, already owned technology?
- What if 80% of the reporting or analytical product coming from this role is NEVER reviewed or never integrated into decision making by the recipients?
- What if finance group clients—manufacturing, distribution, logistics, marketing, sales, customer service—NEED and WANT specific analysis to manage their business but finance bandwidth is occupied with work that goes unread?
And NONE of this, by the way, is the fault of the departing/transferred/promoted employee or executive. Most finance teams are staffed at survival level, and time to be introspective about work content and relevance is in short supply.
The Solution and Getting Support
The time to get these questions answered and to operate on them is immediately after the departure or transfer event becomes known. And the good news is it can be done as part of the relatively standard practice of bringing in an outside project resource to gap the role. For this to be successful, however, there needs to be alignment (not conflict) between the company’s interests and the individual deployed to complete what should in fact be a structured project. That is another example of where the so called “contingent” consulting model that is so prevalent in this market does not work. We have a process for this, and it’s very straightforward.
The alternative carries huge risks and missed opportunity and is a disservice to whoever you hire into the role.
One potential outcome: they arrive, realize they can do the work in 15 hours a week, but because they left a job to join you, they are put into the untenable position of risking their livelihood if they tell you. So they generally won’t, the new hire will be disappointed or bored, early turnover may result and opportunity will be missed.
If you would like to make the most of the opportunity presented by an employee promotion or departure, please contact us. You can also learn more about how we can offer support on our Interim Financial Management services page or by downloading our general service sheet below:
About the Author
David Lewis has been the CEO or founding partner of 5 companies, one a 600-person family business, three successful startups in the areas of executive search, consulting and financial project execution, as well as a venture-capital-backed software development firm. His last startup scaled to a 300-person consulting and executive services firm in seven and a half years. During his tenure, the firm worked with companies ranging from Fortune 500 companies to venture-backed startups. He has deep functional expertise in creation and implementation of accountability systems, planning, finance, talent acquisition and development and key executive coaching. David holds Bachelors and Masters degrees in Economics from Georgetown University in Washington DC.