Think You’re Too Small to Think About International Expansion? Think Again!
Has your startup reached the point where it’s beginning to see the occasional international customer trickle in? Maybe you have a client from Germany, or a small customer who hails from Australia, with a few interested prospects in France, Russia, and the United Kingdom sprinkled in.
That’s great. Sounds like you’ve got a product and a business that has some serious potential. But you’re not ready to execute full-blown international expansion yet. Not to mention you’re not profitable and you’re too small to really consider yourself an international business.
So, at least for right now, there’s no need to worry about international finance laws and tax exposures, right?
Actually, according to former Acronis CFO John Murgo, the opposite is true. If you have any international aspirations (and what smart, in-demand technology company doesn’t these days?), then Murgo says you should be thinking about foreign tax laws and exposures right now, not after you’re a large, profitable company.
Murgo should know. He led Acronis’ global expansion, helping the storage management and disaster recovery software company set up offices in Europe and Asia, where it was able to grow revenue from $20 million in 2006 to $120 million in 2009. Today, Acronis has customers in four continents and numerous countries.
That expansion didn’t come easy and it wasn’t by accident. In a recent conversation, John told me there are a couple of keys to efficient — and highly profitable — global expansion:
1. Start Planning for International Expansion on Day 1
Most founders don’t do that because they’re focused on product development and domestic sales or marketing — and they should be. The point is that it’s never too early to start thinking about why and when international growth can help your business, and how you can execute it in a way that’s efficient and profitable. The earlier you do that, the better, especially if you plan to move your intellectual property offshore when you do go international.
Think about it this way: If you’re not profitable and you’re a small startup business, you can make an argument to the IRS that your IP isn’t that valuable. And if the government is going to charge you 40 percent tax to move operations offshore, isn’t it better to take that hit when your IP is valued at $5 million than when it’s worth $25 million?
The bottom line is that if early stage companies properly plan for it, Murgo says IP value can be shifted offshore with no negative tax consequences. Additionally, by driving down your effective tax rate, you’ll increase cash flow and enterprise value overall. Those are two pretty compelling reason to consider your international expansion plan even if you don’t think you’re ready for it.
2. Create an Efficient International Business Model
While it might be easy to manage a handful of customers internationally without setting up offices or entities abroad, the more you expand globally the more you’re going to need regional offices closer to those customer bases to manage them. So, let’s say you set up offices in Sweden, Switzerland, France, Germany, and the United Kingdom. Eventually, you’re going to need to set up real companies in each of those countries.
For those offices to be truly profitable operations, however, you need to establish a business model that promotes efficiency. What responsibilities will each office have and which roles should you hire to manage those tasks? Too many companies set up redundant processes in each of those subsidiary organizations, hiring administrative, finance, marketing, sales, HR, and IT staff for each location. The problem with that approach, of course, is that it’s costly and hugely inefficient.
If you plan for international expansion in advance, you can easily centralize all of those functions into one big principal company, allowing each of those subsidiaries to squarely focus on the core functions — primarily sales and marketing — that they need to manage.
So, are you really prepared to go international?
International expansion can be enticing and highly profitable, but only if you do it right. If you don’t plan in advance for tax exposures, business model alterations, and international corporate structure, then you’re setting yourself up for a rude awakening when you actually need to address each of those things.
In most cases, international expansion is about either trying to acquire new customers or take better care of existing ones. And while international tax laws and exposures, and principal and subsidiary company structure might seem complex and overwhelming, that’s not an excuse to ignore them. This isn’t about tax engineering. It’s simply about smart, efficient business.