Newport Board Group, a CEO Advisory Firm, Provides Guidance to Middle Market Businesses on How to Avoid the Growing Pains of Growing Globally

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Going global can provide exponential growth for your business, but it is not for the faint hearted

Many parts of the world are growing 3-4 times faster than the U.S. and represent a huge evolving market for U.S. companies seeking to capture the consumer growth surge outside of the U.S.

Few, if any, middle market businesses in the United States are unaffected by the global economy. Many middle market company’s materials, supplies and services might already be purchased from outside the U.S. Customers might already be global companies located on the other side of the world. And even if they are not, the U.S. economy is highly dependent upon foreign countries purchasing and owning U.S. debt, which contributes to interest rate and economic volatility indirectly impacting your business.

According to the Bank of America Merrill Lynch 2013 CFO Outlook survey of CFOs, 62% reported buying materials or services from foreign companies, up from 47% the year before. With respect to all activities, 73% reported buying from, selling into or having actual operations in foreign countries, a significant increase over the 54% of the year before.

As a middle market company, global consumer spending growth could fuel a middle market company’s growth. With the widespread adoption of the social network culture in most countries of the world, accessing global customers is fairly easy. The issue to going global is the challenging laws, regulations and financial challenges to delivering goods and services across countries and of course, getting paid.

The 4 key challenges facing middle market companies looking to establish operations in foreign countries are:

1.    Local Banking - access to international based capital is very difficult for new operations in foreign countries – capital sources in many countries are local banks, often controlled by the government, focused on local businesses.
2.    Local Economy - despite the recovery in the U.S. and the evolving recovery in Europe, local liquidity in countries is still tight and interest rates are often in the double digits.
3.    Balance Sheet Focus – having a strong growth story and proven track record may be sufficient for U.S. banks, but generally, foreign local banks are very balance sheet oriented. Only with cash deposits in the bank will the bank consider you for a loan.
4.    Exchange Risks and Expropriation – will you be able to recover profits earned from foreign sales and will the exchange rates negatively affect your margins?

Going Global Guidance

Before going global, as a CEO of a middle market company, ask and answer 5 key questions:

  •     What is the “right” organizational structure that the company should form to do business overseas? Should your company create a foreign subsidiary, a branch office, joint venture, strategic alliance, work through a local distributorship or hire local sales representatives? Often, the answer to this question is dependent on the local tax rates and the presence of a Value Added Tax (VAT).
  •     What degree of control do you as the CEO want to maintain over the company's foreign operations? Local control generally means leaving money in the foreign country. Headquarters control in the U.S. means focusing on paying debts and repatriating cash to the U.S. instead of reinvesting in the growth of the foreign operation.
  •     Technology integration generally involves a new accounting and finance system that can accommodate foreign operations, currency conversions, labor law variances. Middle market companies often find that system and technology changes need to be made. Companies often end up in Oracle or SAP territory rather than Quickbooks.
  •     Back office services are often difficult in foreign countries, even those that pride themselves on being back-office service nations to the U.S. Shared service centers, common accounting rules and qualified accounting professionals are often few and far between in less developed countries, not to mention the “role” that foreign government employees will play in the business operations in the foreign country.
  •     Currency restrictions also can play a part in how will the company do business in a foreign country as well as export-import laws. Company goods and materials might stay in a local warehouse pending foreign government inspection and the payment of “import” taxes. Not good if you are in the seafood exporting business. Goods frequently get “lost” during transport.

So with all the challenges and barriers, why go global? The U.S. represents only about 3% of the consumers in the world, albeit the wealthiest. Labor costs in the U.S. are among the highest in the world and most everything can be manufactured at a lower cost someplace else. Lastly, many parts of the world are growing 3-4 times faster than the U.S. and represent a huge evolving market for U.S. companies seeking to capture the consumer growth surge outside of the U.S.

The key is to do your research, get qualified and competent advice and stay close to your money.

Michael Evans is the Managing Director of the Northern California practice of the Newport Board Group.

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