Key takeaway: Setting up business internationally is complex, but having the right road map and milestones can help you reap rewards.
Many companies spend enormous amounts of time researching and piloting their domestic launch and customer acquisition strategies. But they often jump overseas feet first with little preparation. Silicon Valley Bank’s Foreign Exchange Team invited Bill Peiffer, director of international expansion at financial consulting firm Vistra, and Steve Wilson, U.S. resident partner at the Eurasian law firm Osborne Clarke, to co-host a series of conversations designed to help dynamic growth companies make the leap abroad. Here are their top tips for executing a graceful landing.
Getting started: Questions to ask
It’s only natural to ask, “When should I start planning for going global?”
Bill Peiffer recommends doing it in steps. First, understand your registration options and timelines. Then, take the time to understand the rules surrounding onboarding and terminating employees. Understanding your options will help you minimize your risks.
Counsels Steve Wilson, nothing sinks international expansion faster than moving without knowing the risks or clearly communicating them to your company leadership, notably the board. Set realistic expectations and timetables, and let everyone, the board, execs and employees, know that it’s going to take time to see the fruits of your labor.
Ask the most important question first, “Why am I going international?”
The most critical question of course should be: Why are you expanding there? Do you have strong evidence that there is a market there for what you are selling? The best case is that you already have strong sales and now it makes sense to put feet on the ground in a particular spot.
But, again, don’t get too far ahead of yourself. The natural inclination may be to just hire a local or transfer a top salesperson and think you are set. You are not. The trigger point for requiring a permanent overseas entity varies from country to country: whether you have an office, have hired your first employee or even if you are only selling into the country. And of course, the local tax authority will want to keep tabs on you. Playing by the rules generally prevents headaches and penalties down the road.
Tips for setting up: Create a realistic timeline
- Corporate structure is a big deal, but when done poorly, it can hurt the U.S.-based parent’s bottom line or expose it to liability. Generally, the choice is to establish a wholly owned subsidiary, reducing liability for the parent, or a branch office. And it’s best to make the decision before your first hire.
- Hiring issues can get thorny. Know how the country defines contractor vs. employee, for example. Take the time to do it right. Research common business practices to protect yourself and be credible in your recruitment process. It can take anywhere from a few weeks to a year to be fully operational, depending on the country.
- If you don’t have time to set up a permanent entity immediately, you may consider short-term options, such as setting up a nonresident payroll, if applicable, or engaging a professional employer organization (PEO), a method of hiring without establishing a foreign corporate entity. It’s a good idea if you want to test a market or future employee, but it may add 20 percent or more to the cost of the hire.
Are overseas business cultures and norms really that different from in the U.S.?
Even in places like the EU, the expectations of employees, business customers and regulators can be very different.
Items to consider:
- Employees. There is no such thing as at-will employment outside the U.S., which means it’s harder to terminate someone. It is critical to understand the proper steps that must be taken. Employment and benefits packages also vary. Stock options, for example, are not popular in some places because of tax rules (see “Where do I pay taxes?” below). Some countries may require supplemental health options, and in some places a company car is typically included in the offer. Employment contracts can be lengthy, spelling out detailed employee rights such as confidentiality and intellectual property transfer, which typically are more rigorously enforced than in the U.S. Non-competes can be hard to enforce and often lead to negotiations surrounding “garden leave,” a situation in which a terminated employee is instructed to stay away from work while still on the payroll.
- Business customers. Closing a contract can take longer overseas than in the U.S. Part of it is out of a customary habit to want to know new business partners before entering into a financial deal with them. On the flip side, business relationships built on time invested may translate to greater loyalty.
- Regulators. Every country is different. Some require large share capital deposits in a domestic bank before giving the green light to operate; others require that invoices and taxes be prepared using government-sanctioned software programs. Still others require that a local person join the subsidiary’s board of directors. Suffice it to say, Know Your Customer and Anti Money Laundering rules are only getting tougher, and they can make setting up bank accounts very challenging. This often impacts your timelines, so be sure to include your bank early in your planning process.
Which functional currency do I use for regular business?
On the face of it, operating in U.S. dollars may seem easiest, but that could hamper your success. In international markets, localizing the sales and payment processes can help make you more competitive. Why would vendors or buyers choose you over a local company if they have to factor in foreign currency conversion risk or credit card FX transaction costs? Paying local employees in U.S. dollars may be good for you if the dollar is strong, but it likely devalues their compensation. And, on the other hand, your products become more expensive to prospective customers.
For more information, read Global Expansion: Why you should care about foreign exchange risk.
Where do I pay taxes?
If you aren’t careful, the answer is everywhere. Do you know the difference between VAT, HST and GST, and how to reclaim VAT? Even now in the U.S., there is a lot of discussion about revised tax law that is changing the thinking on if and when to repatriate foreign profits in the U.S. Get legal advice from experts about aspects on items that may influence your decisions around these issues as well as how to protect your intellectual property.
Bottom line: Setting up shop overseas takes research, time and persistence, but if planned correctly, it may greatly increase your odds of success.
Checklist: FX and accounting decisions to consider
- Before opening an office abroad, consider the corporate structure options: how you organize may carry unwanted liabilities and trigger additional currency risks
- Determine how you want to build a workforce: full-time vs. contractor vs. PEO
- Determine which functional currency you plan to use for local transactions
- Understand the local rules and cultural norms about hiring, invoicing, paying taxes and managing workplace etiquette
- Find the most efficient merchant processing structure for your business model to save on currency transaction and credit card transfer fees
- As overseas revenues grow, identify FX hedging tools to help guard against profits evaporating during currency swing periods
- Get advice from experts on key tax laws that may impact your decisions, including repatriating overseas profits in the U.S.
To learn more about specific strategies and options for launching international operations,
- Read Global Expansion – Why you should care about foreign exchange risk.
- Watch the SVB Tips for Global Expansion webcast replay on svb.com.
This article is intended for U.S. audiences only.
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