Considering an International Transaction? Pick the Right Advisors to Plan for Cross-Border Success
Successful operations in another country or the acquisition of a business or assets to support operations on foreign soil requires a deep understanding of local rules and customs, as well as the related opportunities and challenges. For example, despite the emergence and growth of bilateral and multilateral free-trade arrangements, engaging in cross-border activity may cost more than similar efforts in a company's home country. Likewise, cultural, legal and other governmental norms can differ significantly, even between countries that are free-trade partners. Proper planning and budgeting for these differences can help you avoid unwelcome surprises, while improving operating efficiencies and financial results.
For a company without a history of cross-border success, however, it can be difficult to develop the level of understanding necessary for success on an international platform. Therefore, working with qualified and trusted advisors is a critical element, not only to close a transaction or structure operations, but also to continue cross-border activity efficiently.
Companies typically rely on outside legal counsel in their home country (often together with in-house counsel) to coordinate the legal, financial, accounting, tax and debt considerations of cross-border business activity, interpret foreign legalese and recommend practical action items. Deciding whether to form an operating entity in the local jurisdiction—as opposed to opening a branch office or investing in or contracting with an unaffiliated third party in the jurisdiction—is an important choice that involves a sliding scale of commitment and exposure, as well as varying economic burdens and benefits.
Given the nature of jurisdiction-by-jurisdiction regulatory concerns, it is unlikely that a company's general counsel or outside legal counsel will be licensed to practice law in each country where operations or acquisition activity is planned. Therefore, companies should look to their legal counsel at home to make introductions to qualified advisors in each relevant country. From employment questions to intellectual property, from taxation and entity structuring to contract manufacturing, from overseas product development to out-of-country call centers, cloud computing, business process outsourcing and other service arrangements, there is no substitute for local experience. Asking outside counsel to coordinate with local counsel also helps companies keep their internal business teams (including in-house counsel) focused on operations, negotiations and execution.
Although some law firms maintain branch offices in multiple countries to address international client needs, no firm can be everywhere, especially given the level of activity these days in emerging economies. Plus, the overhead that results from maintaining operations in multiple foreign jurisdictions can lead to inefficiencies and unnecessarily high billing rates. Fortunately, there are alternatives.
While no law firm can provide the answers to every cross-border question, a company should expect its home-country legal counsel to know who has the answers, to be able to assemble an international team if asked to do so, and to know how to integrate the advice of accountants, investment bankers, debt advisors and local-jurisdiction legal counsel to facilitate critical business decisions. Much Shelist's membership in the Alliance allows our attorneys to deliver that level of service to our clients through the efficient, practical and cost-effective transactional advice that is a hallmark of the organization's members.
Financial, Tax and Accounting Advisors
International transactions and operations typically raise questions regarding the movement of money across borders, which triggers issues of repatriation, withholding taxes and other cross-border constraints to the flow of funds. Withholding taxes, for example, are influenced by international treaties and the nature of the income from operations or investment. If the complexity and expense are warranted, a multi-tiered structure can often be utilized to optimize the economics of this kind of taxation.
But most companies cannot tackle these financial issues alone. Therefore, it is critical to select an accounting and tax advisory firm with an international desk of substantial size covering the relevant jurisdictions, and retain attorneys who think globally, understand these complex financial issues and are prepared to coordinate the most appropriate and desirable legal structures. Also, certain kinds of investors or partners can be particularly sensitive to the administrative burdens associated with cross-border taxation. As a result, working with advisors who understand how to use so-called "blocker structures" can help reduce or eliminate those burdens and preserve those vital relationships.
One special brand of financial advisor that is of particular importance in leveraged cross-border activity is the debt advisor. Some debt instruments and facilities work in particular countries, while others do not. Some are technically permitted in certain jurisdictions, but are simply not practical to use. Likewise, what might be structured as a traditional debt instrument in some countries could be more appropriately structured as a sale-leaseback transaction in others.
A debt advisor with knowledge of local lenders—including their capabilities, flexibility, creativity, back-office procedures and ability to execute—will be able to provide suggestions in the planning stages, highlight desirable approaches and identify possible lending sources that are more likely to succeed in supporting the transaction or operational initiative on schedule. For example, if you are planning an asset-backed credit facility to support a cross-border acquisition but due diligence investigation reveals an asset base that is insufficient to support the leverage required to complete the transaction, a debt advisor who works with flexible lenders that would usually consider filling the gap with a cash-flow-based credit facility can rescue your team from falling behind schedule while searching for another lender.
Business Diplomacy Advisors
Working with a business diplomacy consultancy can also be helpful when interaction with governmental authorities in your home country or another country will be required for exporting, importing, permitting, public or quasi-public funding, or understanding the target market. This category of consultants can help you anticipate the response to marketing campaigns or other public-facing statements in a foreign country or to an international body, such as the World Bank. Also, local professionals can frequently provide valuable perspective and make strategic introductions as a part of your diplomatic team.
Look Before You Leap
While moving from a national to an international stage can be a source of great opportunity, the process may also bring significant challenges. Especially if you are considering cross-border activity for the first time in a particular country, it is important to weigh the costs and benefits carefully, and then proceed in the following stages:
- Work with trusted advisors in your home country to complete a preliminary analysis of the proposed activity and consider the international team that would be necessary to support it.
- Supplement your "home team" by engaging appropriate international advisors to provide their own analysis and advice; then consider whether the results support a further commitment of time and money.
- Carefully consider the operational, financial, tax, accounting, legal and debt aspects of the proposed activity and ensure that the resulting plan is compatible across all of these disciplines and accounts for foreseeable contingencies.
- Execute according to the plan, adjust for contingencies and commit the requisite capital to the endeavor.
Deploying resources gradually and in stages can provide early insight into whether a cross-border opportunity meets your projections, while also allowing you to establish a process to constrain overall expenses and build valuable relationships with international partners by setting expectations and then delivering on schedule.