Whether you’re the chief financial officer or a regional HR manager, you play a crucial role in finding and implementing solutions related to the company’s growth plans. When those plans include international expansion, it’s important to consider the various drivers and related challenges—and learn from organizations that have successfully gone through the process.
The most common reason organizations expand into new international markets is to pursue new customers and revenue streams. Exposing your product or services to a wider audience across more countries can dramatically accelerate your top line.
But expanding into additional markets in new countries is no easy feat, and there are major challenges to consider, including:
International company structure: Expansion will require your organization to legally establish an entity in that country through which in can conduct business. The type of business you are planning on conducting in the new country will influence the type of entity you are able to establish, tax rates you will be liable for, and the revenue you are able to report back to the parent company.
Global pricing strategy: During the initial foray into a new country, it’s important to ensure that your price is competitive compared with the local market, but also that all costs are accounted for and the margins remain sufficient to justify your expansion.
You should also account for the higher initial capital expenditure expanding internationally. Some countries, such as Brazil, can have a high cost of establishment both financially and in time. This, along with the required ramp-up time for your new sales personnel, should be taken into consideration when calculating the payback period of your investment.
Market viability: Tools like gap and SWOT analyses can be valuable when evaluating the potential opportunity of international markets. However, markets fluctuate regularly, and if you’re the CFO, you should maintain a significant understanding of the wider markets the organization is already present in, along with those it is considering expanding to.
Allowing the organization time to learn and adapt its approach in a new market is key. Rarely will a three-month venture provide an indication of whether the market is right for you. Evaluate expansion strategies before you decide to make a significant investment in establishing. The cost of withdrawing from a country can be just as expensive as the initial expansion once all the administrative and reporting dues have been accounted for.
One way to help accelerate the transition to a new international market is global employment outsourcing.
Consider the example of a peer-to-peer ridesharing service. In 2014, the company had estimated revenues of $2.9 billion and a presence in 10 different locations. By 2016, revenue had swelled to $6.5 billion, and today, the company operates in over 80 countries around the world.
The company partnered with Safeguard Global to support its global expansion in 39 countries and help reduce the speed-to-market from over six months to just two weeks. This time savings allowed the organization to get a head start on its competitors and gain a significant first-mover advantage.
Mergers, acquisitions, and divestitures
When they’re executed properly, mergers, acquisitions and divestitures can be an excellent way to expand into and withdraw from countries at speed—but they require proper execution. Deals shrouded in complexity can result in some organizations abandoning the deal altogether, and an improper corporate entity structure can jeopardize the transaction as well.
When exploring mergers and acquisitions, you may discover that the transaction does not include the transfer of entities that allow you to compliantly pay the employees you are now responsible for. Ensure that you have services on hand that provide you with a means to pay these employees, without delaying or endangering the entire deal. Consider factors such as:
International company structure: The nature of your business may require registrations in addition to the legal entity you have obtained, particularly in countries where these documentations do not transfer over once the merger has been completed.
Tax codes and compliance: Accounting is one of the largest challenges multinational businesses face, and it’s magnified during a merger and acquisition or divestiture. The deal may mean you’ve inherited a new tax system, set of taxation rates and compliance requirements. And similarly, just because you’ve divested doesn’t mean you are absolved of tax filings.
Compliance with tax laws should be the first priority for organizations, but tax efficiency should not be overlooked. Be aware of the impact of your business location on your tax liability, and ensure to take full advantage of tax treaties between countries, such as the Foreign Tax Credit (FTC) offered by the United States, to avoid paying double taxes.
Global employment outsourcing can also help streamline the transition when it comes to mergers, acquisitions and divestitures.
In the case of a global manufacturer of advanced fuel dispenser equipment divesting from its parent company, it faced unique challenges in 13 countries where it lacked an official legal entity. The company needed a way to pay its employees while it began the lengthy process of building an international branch.
Through a partnership with Safeguard Global, the manufacturer was able to overcome the roadblock of a lack of legal entities and established banking relationships. Through international employer of record services, the company now had the means to securely pay employees, while its legal and finance team formally established entities in the background.
Recruiting new talent
As an organization flourishes, so does the demand for talent, and you may well need to look beyond your local talent pool. Additionally, as your organization ventures into more niche and specialized projects, your employee footprint will start to swell as you identify support around the globe.
The value in retaining existing talent should not be overlooked, either. Instead of saying goodbye to the executive relocating to Germany to be with his wife, find a way to keep him on by exploring options that allow you to compliantly hire and pay employees around the world, without formal entity registration.
As you consider adding to your workforce internationally, here are some important things to keep in mind:
Communication and cultural differences: Hiring in new locations can lead to a despondent culture among the remote employees if organizations do not adequately manage the process.
The additional costs for hiring dedicated payroll and HR expertise for all locations make it unlikely that companies can make this investment for small pockets of employees. But employees, no matter where they’re located, expect full HR support, localized employment contracts and a compliant payroll. Ideally, you’ll have expertise to provide both local HR support and advisement on cultural expectations.
Reporting standardization: Receiving consistent, standardized and accurate data is integral when managing international business. But when you use a mix of local partners in various locations, it’s likely your data and reports on social costs, pay data and operational expenses won’t be consistent across the board. Standardizing your data will lead to consistent reporting that you can use with confidence when producing analyses and evaluating the cost of an international expansion opportunity.
Social costs and benefits: International employment and labor requirements vary greatly from country to country, are they are often incredibly different than those in the U.S. In the EU, for example, employers are required to provide employees with 14 weeks paid maternity leave.
Ascertaining local insight and knowledge to various employment laws and the cost of employing individuals can be invaluable. If you’re the CFO, you understand the importance of receiving accurate details that allow you to forecast and budget your global expansion cost with precision—as well as the consequences when you don’t have them.
No two reasons for international expansion are ever the same, and many organizations often underestimate the expertise needed. As you continue down the path of global expansion, it’s important to become familiar with the requirements and regulations as well as costs that will arise.
Understanding upfront and maintenance costs will provide more insight into which countries are best for your business and how it will affect your long term growth. The more expertise you have with these highly nuanced scenarios, the greater your chance of success.