A company doesn't have to be huge to go global, but it must do its homework and then be prepared for a lot of paperwork, all while staying responsive to its clients' needs, according to experts.
“A family-owned manufacturer and distributor in South Jersey that does about $50 million a year in sales wanted to expand internationally,” said Christopher Gaffney, a tax partner at the Clifton office of Sax LLP and member of the accounting, tax and advisory firm’s manufacturing and distribution industry service group. “Before they did anything, though, we recommended conducting a market research study that examined the current demand and growth potential for their products in a variety of overseas markets. Once completed, we helped them digest the results and weigh whether the cost of compliance for nexus in foreign markets outweighed the value of being there.”
The market studies suggested a thumbs-up, so the next step was to consider nuts-and-bolts issues such as: registering and remitting local income tax; VAT (Value Added Tax) and other taxes; whether U.S. taxes could be offset by taxes paid overseas; and, where applicable, limits on transfer pricing, or the price that one arm of a company charges another for supplies or labor.
Sax LLP is a member of the RSM US Alliance and RSM International — an affiliation of independent accounting and consulting firms — so Gaffney and other partners were able to tap into a global pool of on-the-ground local talent for accurate and timely information.
“In this case, it worked out well for the company,” noted Joshua Chananie, a Sax manufacturing and distribution partner who also works with the client. “But each case is different, and every country is different, so you need to do an analysis before going overseas or [if you’re already global] even expanding into an additional country. Company branding and brand name recognition plays a critical role, as a foreign customer’s ability to recognize the product and company will help grow top-line sales and ultimately profitability.”
Companies should also make sure they hire the “right” sales people, those who are dedicated and know more than just the product, Chananie suggested.
“You want to find someone who has done business with the jurisdiction before and knows the lay of the land,” he said.
Businesses that are operating in certain countries may also find themselves getting hit up for “grease-the-palm” handouts that make can make it easier to overcome roadblocks. But while those kind of under-the-table payments are standard procedure in some countries, they’re illegal under U.S. laws including the Foreign Corrupt Practices Act (FCPA). In one infamous 2011 example, New Brunswick-based Johnson & Johnson paid more than $48.6 million to settle — without admitting or denying the allegations —Securities and Exchange Commission charges it had bribed public doctors in several European countries and paid kickbacks to Iraq to illegally obtain business.
One business owner who says he is vigilant about staying on the right side of the law is David Whitman, CEO of Sunhillo.
“We ensure that we follow export rules and adhere to FCPA,” said Whitman, whose West Berlin-based company provides surveillance data distribution and conversion products and services for the Federal Aviation Administration, U.S. military and national defense organizations around the world. “This way I never have to worry about any export violations. We just let it be known that we follow U.S. rules, so we never had any problem.”
Sunhillo jumped into the global arena about 20 years ago after “we found we had saturated the U.S. market,” Whitman explained, noting the company already had credibility since its work for the U.S. Department of Defense meant Sunhillo products already were in many U.S. overseas air bases.
However, before the business could sell to overseas civilian and military authorities, “Our products had to be qualified as ‘non-security items’ by the U.S. Commerce Department,” he said. “We also joined the World Trade Center of Greater Philadelphia, which provides help with exporting and other issues.”
Business owners also need to think long-term when they’re dealing with international governments.
“It can take three to five years from an initial sales pitch to an actual sale,” Whitman warned. “A lot of the equipment we sell is part of a larger system, so there’s a lot of design and testing to be done. Also, when you’re dealing with government budgets, you can be facing a multiyear process. Year one they’re setting up a plan, Year two they’re testing it out, and then in year three the budget may finally be implemented.”
Whitman balances the company’s cash flow “with a long pipeline.”
“We’re currently working on projects that were proposed four years ago, and we’re bidding on projects that are four years out,” he said. “Sometimes we’ll also develop products that government agencies haven’t even requested yet — but we’ve met with customers and see what they think is happening, and then we’ll invest in R&D and identify products that we think will be needed. This way, when the clients put out a [Request for Proposal], we’re already a step ahead of our competitors.”
In the complex environment of international expansion, that kind of attitude can spell the difference between success or failure.