By Eric Hall
At some point in a company’s life the CEO will have to decide whether to expand internationally. It’s a global economy and focusing just on the U.S. market can negatively impact growth and profits. The reasons for international expansion could be new sales opportunities, manufacturing, clinical trials, taxes, regulatory, or political.
Timing is Everything When Expanding Internationally
What should be the timing of your decision to go international? Most CEOs don’t realize that the time to start thinking about going international is before you even start up your company. There are a lot of things to consider when going international and timing is key.
Given the “anti-business” climate in Washington D.C. these days, I would seriously consider incorporating in a more “corporate friendly” jurisdiction like the Cayman Islands, Panama, Ireland, Singapore, or Switzerland. The tax savings and regulatory relief alone could make it worthwhile. My recent experience with a life science client when we located our European headquarters in Basel, Switzerland resulted in a very low tax rate, improved access to the EU, and access to a pool of highly educated R&D professionals. Other countries have gotten very competitive when enticing companies to locate operations inside their borders.
What is your Long-term Vision?
You also need to look at what is your end game. It is very easy to go public on Nasdaq as a Cayman or Irish company issuing American Depository Receipts (ADRs). I recently helped a client take their Cayman parent public on Nasdaq. Financials were issued under IFRS with no issues. Operations were headquartered in China with branches in the U.S. and Australia. Investment bankers, law firms, and Nasdaq are all experienced in helping non-U.S. companies go public in the U.S. M&A transactions are also not a problem between U.S. and foreign companies. You do need to be aware of IRS “inversion” rules that still may require you to be a U.S. taxpayer on your global income.
The decision doesn’t rest primarily on tax and regulatory considerations. All leadership teams must frame this strategic decision within a broader context. They must also look at their long-term vision for the company, specific market opportunities, the geo-locations of key customer markets, legal and intellectual property advantages associated with making this move, availability of local talent, and also the costs of doing business internationally. I constantly hear the complaint that it’s not cost effective in other countries. Mercedes-Benz, Roche, Novartis, Lloyd’s, and other global companies are able to compete in the U.S. even though they are headquartered in these so-called high-cost countries. Once you do the financial, social, and environmental analysis, you may find that other countries are on equal terms with the U.S.
Non-U.S. headquartered companies may find they don’t have to deal with the same restrictions to commerce that U.S. companies operate under. The EU operates under different treaties and trade agreements with countries like China, India, or Russia or regions like Africa or Latin America. The increasing tension between the U.S. and China may make it difficult to conduct clinical trials or R&D. Those tensions may not exist between the EU or Switzerland and China.
Run the Numbers: Financial Rationales for International Growth
Finally, the financial reasons for going international need to be analyzed and evaluated. The U.S. taxes global income. Do you want to be headquartered in the U.S. with a 21% corporate tax rate or in a country with a tax rate of 15% on profits? What are the costs of accessing talent in non-U.S. countries? You have to look at the total cost of employment – wages plus benefits. When you add up the costs you may find that the total cost between the U.S. and Germany is not that different. Remember, you’re not playing by U.S. rules and laws in another country. Most U.S. companies get into trouble because they don’t understand the rules and laws or willfully ignore them. It’s an away game and away rules! I have a client with R&D operations in Spain because they have access to a talented pool of employees at a lower total cost than in the U.S. You can find the same in Switzerland, Chile, France, Sweden, or many other countries. We don’t have a monopoly on talent in the U.S. There are a lot of good, smart, motivated people everywhere at a cost that is competitive with the U.S.
So, run the numbers using a bottom-up approach and see what the real cost/benefit analysis shows. The decision to move internationally must ultimately balance the upsides and the downsides of various scenarios of “going international” in your specific situation. As a CFO, it is critical that you are at the center of this analysis for your business. By laying out the key assumptions associated with each scenario, you are best positioned to make data-informed recommendations to the management team and the board. You need to run all the numbers, carefully evaluating the strategic and financial impacts of restructuring operations and your organization when you make this move. Your scenarios may involve moving the company headquarters, creating branch offices, adding subsidiaries abroad (either through startup or acquired operations) and/or relocating selected departments (e.g., distribution/warehousing, R&D, sales and marketing, etc.) outside of the U.S, and transfer of IP.
Be sure to include the tax, regulatory compliance, and environmental, social and corporate governance (ESG) costs in your analysis. The latter is becoming more important globally and in the U.S. ESG is increasingly being factored into investor decisions for public and private companies. The cost of compliance may be less in foreign countries.
How to Execute Your Move to “Go International”
So once your team has made their decision to “go international”, how do you start to execute on the plan?
Fortunately for U.S. companies considering this move, many countries have now invested in U.S. offices specifically to help companies who need to move their operations to those locations. These domain experts are invaluable in providing details about the implications of relocating and you would be wise to leverage their resources. Be sure to identify and work with local government officials or NGOs. They can help you navigate the bureaucracy, find resources, make introductions, find suitable real estate, and even negotiate on your behalf. It’s win-win for both of you and it’s usually free!
Put Your Team Together
Recruiting the right team is everything when making this type of major strategic and structural move with so many cross-company impacts. You need to pick the right players.
Your legal team should include both a solid U.S. firm with international experience, an offshore law firm that operates in your country of choice, and local law firms who know the regulatory and employment laws associated with your specific international location.
You also need both a tax advisory team as well as a solid accounting team. Any of the Big 6 accounting firms can provide these resources. Personally, I like to have separate firms for advisory services and attest services, especially if you are a public company. No need to create potential conflicts of interest! For one of my clients, Deloitte provided the audit and tax compliance services. BDO provided the consulting and advisory services when we set up our European headquarters. Your role is key to keeping both firms informed and working together to achieve a common goal.
Similarly, banking partners should include any appropriate U.S. partners as well as local banking partners who understand the capitalization and capital requirement rules in your new location and can handle the capital accounts on your behalf. Local banks can also help you navigate exchange controls, dividend distributions, and future capital infusions.
Choose Your Preferred Structure for International Operations
Are you moving your headquarters from the U.S. offshore or are you establishing an international headquartered subsidiary underneath a U.S. parent? Both are very different operations and have different tax, legal, operational, financial, and governmental requirements. Who will be the CEO or president of your non-U.S. entity? I don’t recommend having the same person be the head of the U.S. and international organizations. In my opinion you want to have that separation of duties and decision-making responsibility. You should have separate Boards of Directors for your U.S. and international operations. This may also be a legal requirement in the country of domicile. Each country has their own requirements for directors that you need to follow. Again, ESG requirements of each country differ and should be adhered to.
You also need to decide if you are going to have branch or subsidiary entities in each country you operate. Foreign governments have caught on and the cost and capital advantages of having a branch office are disappearing. You may find it’s cheaper and regulatorily easier to operate as a subsidiary, especially when it comes to employee costs. Foreign governments want you to be a good corporate citizen and on equal footing with other companies operating within their borders. Being a subsidiary may also open doors to benefits, subsidies, and incentives not available to a branch office. Ownership of your IP will also be affected by this decision. The same goes for transfer pricing for intercompany service agreements, product sales, and transfer taxes for capital and IP. The U.S. will tax you when you move IP out of the U.S. The longer you take to do this translates into a higher tax as the valuation of that IP appreciates. Earlier is always better if you intend on being and international company. Don’t forget to look at the cost of moving capital and profits between countries. Distributions and capital repatriation may or may not have an associated high cost. Your legal and accounting teams will be able to help you with this.
Choose Your Moment to Execute Your International Move
Depending on what else you have planned on your company roadmap, a decision to open up operations of any scale in a new location needs to be timed correctly. Even with all the pieces in place, things can go awry when you are dealing with so many moving parts. Choose your moment. Make sure you have contingency plans if your move gets delayed for some reason. Over-communicate internally and with your international partners. Crisis management models are good analogies here. Put your plan together and stay on your path.
If you’re considering a move abroad for your company, let us know. At FLG Partners, we have several partners who are experts and can advise and assist you in making your decision to go international and expedite your path to execution.