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On average, a business seeking to expand into a new market has an up-front investment of time, capital and labor – setting up an entity can take up to a year and cost upwards of $75,000 in addition to hiring your in-country team. If your goals are to quickly capture market share in a new region, company leaders and financial executives need to ditch yesterday’s playbook if they want an international move to be successful in the era of global volatility, wage inflation, COVID-19 and work-from-anywhere.
While many companies go on to crack new markets, increase their market share and tap new revenue streams by going global, a surprisingly large number still struggle with getting a meaningful return-on-investment in the years that follow an expansion. Many opt for the one-size-fits-all model of setting up a legal entity overseas, which can be time consuming and as mentioned above, many organizations greatly underestimate the total costs associated with bringing the needed legal, tax and HR expertise in-house to ensure success.
A move into new territory brings new challenges, and company leaders often overlook key market expansion complexities, relying on their successful domestic market strategies to easily carry over internationally. Budgets, regulations, tax considerations and compliance concerns vary widely by country, and are not always given the scrutiny they deserve. At best, financial executives might know what markets are doing well and where the business should plan to enter, but it can be next to impossible to predict how laws and regulations might change, affecting pay and statutory withholdings from one year to the next—or even one month to the next.
While for many organizations business growth demands expanding globally and establishing an international presence, today’s senior financial decision-makers are tasked not just with managing cash flow and the balance sheet—they’re expected to drive growth and figure out solutions to match the fast-paced progress the modern, multinational corporation expects.
Here are three tips for CFOs and financial directors when determining the potential financial impact of global expansion:
1. Be Adaptable and Agile - The regulatory, employment, tax and cultural considerations of a new market are daunting for everyone involved – especially payroll and finance teams. Thriving in new markets requires companies and finance teams to be adaptable and agile, as they may need to change course or shift processes at a moment’s notice. What may be clear cut for your U.S. operations, may come with increased complexity in different regions. Finance teams must be prepared to navigate ever-shifting national tax regulations and manage local regulatory environments and their implications. By being adaptable, you can ensure that there are no expensive setbacks that derail expansion. It’s also important to ensure that procedures are in place between various departments, including HR and accounting, to ensure that immigration, tax, payroll and relocation go smoothly.
2. Manage and Understand Risk - It’s important for finance teams to understand the fundamental risks of noncompliance, be they direct penalties, reputational harm, or the ability to operate. Take permanent establishment risk as an example. With globally mobile employees, there is an increased possibility of unwittingly creating a permanent establishment. When this occurs, companies are required to register the company as a taxpayer, remit taxes, file local country returns and pay corporate income taxes..
Even short-term business activities can trigger permanent establishment, which is why it’s so essential for companies to tread carefully and keep these risks in mind. By understanding the risks at hand, finance teams can help mitigate the risk of falling out of compliance.
3. Find the Right Partner - Companies often want to enter a new market – whether to test it out or to be the first to establish a presence in the market - without the time and expense that go into creating a new legal entity. While this is the right move for many businesses, they must still navigate all of the regulatory, legal and tax concerns of the country. Companies fitting this description usually work with an Employer of Record (EOR) - a company that already has legal entities established in foreign markets. But global EORs come in different varieties, so it is important to find the one best suited to meet your company’s needs in order to capture that first-mover advantage. If the expansion is a success, and your company wants to continue to hire in that new market, the right global EOR can help you scale quickly. If the establishment of an in-country entity seems like the right direction to move in, the right global EOR can help with that as well. Some global EORs offer help beyond hiring, and assist with tax reporting, payroll and other considerations. The right partner offers flexibility and expertise in understanding varying financial laws, so your company can make changes to its expansion roadmap with full support.
The world looks very different today than it did even two years ago because a series of changes have shaken up the workplace and the economies of every country worldwide. Businesses grow. Needs change. It’s the cycle we hope for, but it also adds complexity to strategic planning in multinational companies. As the CFO, you can spearhead the global expansion process and identify opportunities to keep costs down by developing an intentional, detailed plan that enables your company to navigate international legal and financial intricacies.
Jason Keever is the President of GEO at Safeguard Global.