Monday, May 11, 2015

Expanding Foreign Business to the U.S. Markets

As a business lawyer, I’m constantly focused on business growth and liquidity, with a healthy respect for compliance and risk mitigation. Lately, I have been on the road a lot, both here at home in the U.S. and abroad, attending conferences and meetings, where I have been hearing and answering questions on how entrepreneurs and small to mid-sized foreign businesses can enter global markets? This is a key concern for my business and for my clients.

It’s also the key topic in a conference I will be attending this week in Milan sponsored by the International Bar Association Committee on Small International Business. It was the basic theme of the U.S. Department of Commerce’s “Select USA” program that I attended in Washington last month with 2,500 foreign business owners hearing promotions from 44 states and the Feds on why a foreign business should invest and employ workers in the U.S. Earlier this year, I spoke at a meeting to UK tech businesses about expanding their operations in the U.S.

Let me share with you what I have learned and the questions every business needs to ask itself when expanding across borders:

What are your business objectives? First, consider the type of local activity: manufacturing, distribution, sales, R&D, shared services? By determining your requirements for a new operation, you can develop criteria for evaluating locations. This will help focus on the essential local operations. For smaller companies, a U.S.sales office might be the first opportunity by generating new revenues at marginal cost. For larger companies, toehold acquisitions achieve an instant workforce, manufacturing capability, installed customer base and local management. For all, localization improves branding and the quality of the customer experience.

Second, conduct a “cluster analysis.” At an early stage, you will want to identify the “clusters” of talent pools, markets, customers, customer influencers, supply chains, logistics and other local service providers. The U.S. Department of Commerce has developed a “cluster” database that can help identify clusters by industry, such as information technology, data services, automotive, pharmaceuticals, new technologies, manufacturing and business services.

Third, consider the balance between up-front capital investment costs and anticipated operating revenues and cost savings. You’ll need a financial analysis that gives you a model for identifying and optimizing return on investment (“ROI”). If you have a web-based SaaS platform, your marginal capital expenses can still be significant, but you can cut them using shared work spaces (e.g., Regus, WeWork) and incubators, a mobile workforce, Cloud-based infrastructure and virtual operations. 

Fourth, research the availability of incentives, grants and tax credits from local, state and federal governments and balance them against tax liabilities. The Select USA program identifies a list of 10 reasons to invest in a particular state. The states are both competitive and collaborative. Incentives can include income tax holidays (e.g., “Startup New York”), tax credits, abatements or rebates, project grants for capital investment or R&D, incentives for hiring and training local employees, abatements or rebates of property taxes, electricity costs, and eco-incentives (e.g., energy savings, pollution control).

Fifth, consider alternative sources of capital. Few foreigners understand the uses of the EB-5 employment-based visa as a source of investment capital. This federal immigration law permits you to finance a U.S. business by capital investment from other foreigners. You can reduce your cost of capital, but you must meet eligibility requirements for both the project and the foreign investors. For each investor, you’ll need to guarantee 10 full-time jobs. Each investor will need to invest at least $1.0 million (reduced to $500,000 if coordinated through a “regional center” for EB-5 visas).

Sixth, plan the legal structure. An effective legal structure will start simple but must follow certain rules of the game to limit unnecessary liabilities for taxes, regulatory compliance, employment practices, contractual obligations and supply chain risks. In my experience, foreign companies all want a Delaware corporation. Yes, that’s often an essential part of the puzzle. But there are other considerations, such as where intellectual property will be created, licensed and used, so that you might need a separate IP operation elsewhere. And for foreign startups, access to U.S. VC funding may require a new U.S. holding company and perhaps even a new U.S. operating company. A dual structure can also be essential for planning acquisitions in the U.S. And don’t forget to “tie the bow” with appropriate intercompany agreements on financing, services, licensing, sales and administration.

Finally, get the right people. Many foreign companies start their U.S. operations with foreign expatriates. That might be necessary for U.S. subsidiaries that will need to build upon a unique business model, mission, culture or operating structure. In my experience, foreign expats are generally essential for starting new U.S. operations, but over time talent can come from many sources. Americans today are more multicultural and globally oriented than 20 or 30 years ago, so hiring local talent with multilingual skills may be down the road for you.

I’ve seen some smart solutions by foreigners. Big American consulting companies often hire well-paid employees to work mostly at home and “on the road.” Like Americans, they might choose to have a small (or virtual) a corporate office or a shared showroom in a big town and keep other functions in lower-cost locales in the US or abroad. We had one foreign client that organized a US holding company, got funding in California, paid its foreign staff from the US funding and had only two US employees, in sales, in a city with their core customers. I was not surprised when they sold to a Japanese strategic acquirer at a multi-million company valuation after 8 years of innovation, growth and “globalization.”