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International expansion: Is your company ready? (Part three)

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In part one of this series, we explored the pressures that cause us to consider international expansion for our companies. We also discussed the importance of market research surrounding cultural differences and structure (distributor, joint venture, wholly owned subsidiary). In part two, I shared lessons learned over 30 years as a senior executive running international operations for Fortune 500 companies.

In part three, the last of this series, we will focus on international finance, logistics, labor and treasury functions.

International finance often plays a decisive role in determining whether you should go with an arm’s-length distribution structure or take a controlling interest in your international operations. Considerations such as protecting intellectual property, competitive advantages or service-level consistency when serving major home-market customers’ foreign subsidiaries are legitimate reasons to take a controlling interest in your operations outside of the home market.

However, these concerns may be mitigated sufficiently by selecting the right distribution partner, as illustrated in part one of this series. The right distribution partner worldwide, or in a particular country, would allow your company to minimize the use of its own capital while taking advantage of the opportunity to expand outside of its home market. In an earlier article titled “Why company leaders need to think like outside investors,” I demonstrated why return on investment should be optimized even if gross margin is negatively affected. This is doubly true when dealing with foreign markets. When foreign markets are targeted for expansion, consideration should be given to the possibility of future restrictions on repatriation of profits and barriers that favor local operators. Transfer pricing between entities that are owned by the same entity can be subject to scrutiny by authorities.

Be prepared to face currency exchange rate risk. If you choose to invest in a country other than your home country and the exchange rate there devalues against the home country currency, not only will your equity in that country be worth less, but your product will also be less competitive against locally made products. Borrowing in the local currency may be a good strategy; however, your local entity in the foreign country may not have sufficient borrowing power to cover the amount needed without a guarantee from the parent company.

Here’s a tip. In the event that your company operates different product lines independently in the home market, when expanding internationally it is best to combine them into a single entity with a shared treasury function in each country. This way they can borrow from each other, present a stronger balance sheet to financial institutions and perhaps gain tax advantages. Such a combination also affords the opportunity to hire seasoned, savvy local management that will add value and complement the expertise of the product people you send out from your headquarters.

Supply chain lead times can increase costs for destinations that are on lanes that are served less frequently or involve multimodal transport. Costs can also increase through constant delays related to clearing customs. Be sure that these issues are clearly identified when you’re determining which markets to target.

Affordable and abundant labor may be one of the attractions for expanding internationally. However, the rate paid per hour may be misleading. Will the savings in labor costs make up for the added cost of materials, logistics and tariffs? What are the real labor costs when productivity, benefits, ability to hire and fire, training, and government regulations are included?

In my experience working at Xerox in the 1970s and ’80s, the company approached Latin America with a realistic human resource strategy by setting up training centers in key countries around the region. That allowed them to plug the gaps in technical, sales and management training. Among the benefits Xerox accrued were reduced spending on expats, attraction and retention of a highly motivated workforce, and quality of work standards that met or exceeded the levels achieved in Europe and North America. An added benefit was a great understanding of the developing country markets.

It has been a pleasure to share the lessons learned during the more than 35 years that I managed operations outside of my home market. Please contact me if you would like to discuss any aspect of international expansion. Let me leave you with the following bullet points that were the basis for this three-part series:

  • Buyers in each market exhibit different buying habits, even if they speak the same language that is spoken in your home market. Local knowledge is required.
  • Conduct market selection research that emphasizes culture, human resources, government regulation, financing, logistics and aspects that may be barriers to entry, in addition to the more obvious product-related research.
  • The decision to invest in a wholly owned subsidiary or a joint venture, or to name a distributor, requires deep research and participation by all involved in the business.
A water dribble hitting the middle of a calm water gathering.

The Ripple Effect

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As I work with companies in a variety of businesses, I generally focus on specific financing needs that run the gamut of scenarios; from high growth to high financial stress. My client is focused on addressing the company’s financing needs as it impacts company operations and seizing new business opportunities. At first glance, one could view the impact of acquiring the needed financing more narrowly. However, businesses are multifaceted, and the benefits extend throughout all aspects of the business and beyond, as well as positively impacting the U.S. economy as a whole.

Each party that interacts with a business is its own microcosm that has the same financial and operational needs. Whether it is a supplier, a customer, a building owner, an equipment provider or service provider, each has a vital interest in conducting business with companies that are financially stable and readily able to meet their financial obligations. In doing so, each party in turn can meet their own financial obligations as well.

The most poignant impact of a financially stable company is the ability to retain employees and attract desirable new employees. Every employee has their own set of financial obligations that need to be met. These would include paying their rent or mortgage payment, car payments, food, goods and services etc. Those providers in turn benefit and are able to address the financial and operational need of their business. The effects are felt further and further out into the economy. As in a single stone being thrown into a pond, the ripple effect generated spreads far beyond the point of initial impact. Given that small businesses constitute the vast majority of employers in the U.S., and correspondingly dramatically impact our overall economy, the value of companies having the requisite financing cannot be understated.

An important functional benefit is that when a company’s financing needs have been met, the business owner’s time and attention can be more readily focused on those issues that promote stability and growth versus being preoccupied and distracted with trying to find an answer to a financing shortfall. I have seen time and time again the emotional relief when this critical issue has been addressed.

I would welcome the opportunity to discuss my services with your clients and/or prospects as well as their far-reaching effects throughout their business.

An individual broken down on the side of the road with the hood of his car lifted.

Looking Under The Hood

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The other day, I was thinking about the complexities of running a business and the many operational and financial components that must be in sync to truly optimize it success. As I thought about drawing a useful comparison, a gas powered car engine came to mind. Taken individually, each part of the engine contributes to its performance. However, if one or more of the parts does not operate properly, performance can be degraded, or worse yet, the engine can be seriously damaged. Critical to the operation of the engine of course is fuel. An unobstructed flow of fuel is the lifeblood of an engine. All components of the engine rely on the fuel to allow them to operate effectively and consistently. Conversely, any restriction of fuel will cause the engine to operate inefficiently, damaging parts and potentially causing the engine’s performance become erratic or to stop operating altogether. This comparison created many parallels as to the operation of a business and the critical role predictable cash flow plays in optimizing its performance.

While having predictable cash flow is seen as fundamental to the operation of a business, the ripple effects on all aspects of the business, not unlike the effects of fuel on the operation of the engine, bear further mention. The overall impact is that business decisions can be made, versus limitations and/or deferral due to undetermined receipt of payments by customers. These include:

  • Timely payment of suppliers – ability to take on more/larger orders and potential to negotiate discounts
  • Staying current with payables
  • Equipment leasing/purchase
  • Expanding facility or acquiring a new facility
  • Retaining/adding employees
  • Staying current on tax payments
  • Expanding marketing efforts
  • Engage needed advisors/consultants

While the above list is not all encompassing, it highlights the critical impact cash flow has on the business. An important by product is improved financial performance, ability to reduce debt and position the company to be a viable candidate for traditional financing or the ability to increase current financing availability. The result is a «high performance company hitting on all cylinders».

If your clients and/or prospects are experiencing «engine knock» in the operation of their business due to poor cash flow, I’d be happy to discuss a tune up and maximizing their financial MPG.

Just In Time – Just In Case

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When a pressing need arises, we’re just in time. When planning for the future, we’re there…. just in case.

In working with a variety of clients, there have been numerous scenarios that called for using my financing services. They have run the gamut from seizing a sizable business opportunity to just keeping the doors open. In many instances, the timing was crucial, and we were “under the gun” to establish the account and start funding. In the alternative financing industry, these occurrences are common. However, it benefits all parties if a more time is available to address the issues on a proactive and strategic basis. While it may be a short term or “one off” financing need that we’re addressing, more often a longer-term integration of alternative financing is called for. That being the case, having time to assess the impact of predictable cash flow and the ability to confidently take on larger clients/orders aids in being able to make critical business decisions, many of which have been deferred due to the lack needed financing resources. Equally important, is the business owner’s ability to utilize those resources as they see fit. By being able to do so, the overall cost of the financing can be more effectively controlled.

At Liquid Capital, we utilize a business model that provides the business owner not only the needed financing but a level of discretion and flexibility to customize our services to their specific needs. Once a client’s customers are approved, our client can choose which customer, which invoice/s and the timing. Whatever the situation; a seasonal spike or lull in sales, a creditworthy but slow paying customer, a supplier needing a payment before shipping or an inordinately large order, the client can use our services as needed. Conversely, if there’s no current need, there is no requirement to use the financing nor any cost for not doing so. Being available as an “On Call” resource gives our clients confidence and comfort in conducting their business free from the frustration of second guessing when or if they’ll have needed cash flow.

This same flexibility benefits our banking partners. In working with a bank client, many times it’s only necessary to finance receivables of a select number of clients and specific invoices versus having the client finance all eligible invoices. This allows us to address the needs of the client while leaving the bank in a secure collateral position…. truly a win/win scenario.

“Success or failure in business is caused more by the mental attitude even than by mental capacities”. – Walter Scott

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Tom Stamborski Cash Flow Financing – “The Mind’s Eye”

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No matter what stage of business you’re in, get ahead with Tom Stamborski Cash Flow Financing tips and business advice.

Tom Stamborski Cash Flow Financing

In working with various clients and prospects, beyond the strategic cash flow financing that I provide, the mindset of the business owner is an important factor that has to be taken into account. The business scenarios that create the need for my services cover a wide spectrum of circumstances. They run the gamut, from high growth to business survival.

Central to the situation is a triggering event that creates the need to enhance cash flow.

Can’t qualify for traditional bank financing?

For newer companies that currently don’t qualify for traditional bank financing, private assets are normally limited and operations progressively become strained. Suppliers demand upfront payments and restrictive terms. Customers prefer to stretch out their payables as they contend with their own business issues, creating an unpredictable cash flow stream. Continuance of this scenario puts many companies at risk during a very vulnerable period in their life cycle.

Need even more financing?

For high growth companies, a common problem is that, in many instances, their current bank is unable to increase the level of financing availability as rapidly as their growth would dictate. This, of course, is an unfortunate situation as their growth opportunities could catapult them to the next level of development.

Are there more options?

For companies that fall between these two scenarios, there are different variations. Due to industry downturns, poor management practices, internal disputes, etc., their financial statements reflect losses and weakening financial ratios. This can result in their financing availability being frozen, reduced or not renewed.

In the case of their current bank having capital issues, the result could be the bank asking the client to leave. As the situation intensifies, it logically puts increasing pressure on the business owner. As they become more fixated on finding a solution, they unfortunately are drawn away from important business activities, thereby exacerbating the problem. In many instances, by the time I’m called in to assist the prospective client, I’m providing a form of cash flow triage.

Tom Stamborski Cash Flow Financing: Helping you get ahead

As I’m able to implement a strategic plan to address and stabilize their cash flow needs, the corresponding benefit to the business owner is their ability to revisit important aspects of their business such as developing or refining their business plan, marketing and sales as well as expenses and profit margins. With predictable cash flow, they can confidently make the important business decisions so vital to their company.

Being in business is not a clinical exercise. It’s fraught with a range of emotions that run the spectrum, from bolstering a business owner’s confidence to a level of concern bordering on desperation. I’m gratified that I have been able to play a part in delivering the financial resources so crucial to the viability and growth potential of my client’s businesses. I’d welcome the opportunity to be of service to those prospects and clients where you deem my services to be appropriate.

“Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice and discipline”. – Jim Collins

International expansion: Is your company ready?

International expansion: Is your company ready? (Part two)

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In part one, we explored the pressures that cause us as leaders to look at international expansion for our companies. We also discussed the importance of market research surrounding cultural differences and structure (distributor, joint venture, wholly owned subsidiary). In part two, I’ll share lessons learned over 30 years as a senior executive running international operations for Fortune 500 companies.

We will go in-depth to discuss the management of international operations. The focus should be on avoiding the common mistakes that cause you to have less market share and be less profitable outside of your home market. Assuming you have applied the subject matter discussed in part one correctly, you won’t choose a market for expansion only because potential customers speak the same language. Ask yourself why Target failed in Canada when its headquarters in the U.S. is so close to the Canadian border.

Let’s talk about the culture that elevates the most successful people in the home market to leadership roles in the international expansion effort. When culture, which is transmitted through language, is ignored due to a company culture where leadership reflects home market success, the effort is likely to fail.

Part one signaled that a decision needs to be made regarding alternative structures for market entry. When I see a company having to choose between a distribution organization, a joint venture or a wholly owned subsidiary company, I recommend that the answer should vary by country. You should consider a weighted matrix that includes these considerations at a minimum: return on investment, commonality of customer base, competition, barriers to entry, financing and logistics. Obviously, the decision made for country A would not necessarily be correct for country B. Also, the weighting of your matrix items needs to vary in relation to your product category and local regulations. Should a company merely mimic its home market success as its expands internationally, the odds of success are against it.

Why did I place return on investment first on my list of considerations? I know that focusing on ROI favors choosing a distributor network structure, with the drawback that selling wholesale produces a smaller gross margin. However, your objective is to consider the return on investment that is repatriated to the home company after taxes as a percentage of the investment in the foreign country, rather than in-country gross margin.

Commonality of the customer base influenced my decisions while running international operations for a major truck leasing and logistics company. The company’s international expansion was fueled by following customers in automotive logistics that the company served in the U.S. The key was to provide the same systems and experience that they were used to. Rather than invest heavily in assets, we chose to become a third-party logistics provider, supervising local logistics companies to help them provide an equal level of service as in the U.S. We chose to go the route of being a wholly owned third-party logistics provider with logistics design and systems, rather than operating trucks, warehouses and equipment.

For other clients, such as two major car rental companies, I’ve chosen to go in another direction since there was little commonality among customers. Outside of the U.S., it is very common to provide cars as a perk to management. As a result, the business of fleet management is much more important to car rental companies. Plus, taxation, environmental regulations and tourist preferences make airport locations outside of the U.S. less attractive. Certainly, we catered to members of frequent renter programs while keeping the focus mainly on fleet management.

Since local competition in most countries benefits from both obvious and not-so-obvious barriers to trade, do your homework. Among the obvious barriers are tariffs on imports, the need to meet standards that are different from country to country, exchange rate risk and government “buy local” policies. However, the lesser-known barriers need to be studied as well. Examples are controls on access to hard currency, protection of local distributors and dealers, and labeling requirements.

When Colombia faced a sudden shortage of hard currency in the early 1980s, the Xerox affiliate I was running couldn’t import spare parts to support our large customer base unless we could find a way to earn dollars by exporting something. Another company gained market share because it already had export divisions that generated hard currency.

Many countries protect local distributors and dealers of imported products by making it extremely difficult to terminate such relationships. Beware of the international buyer who appears in your home market and purchases your product for export to a foreign country. In that country they may pose as the distributor of your product. You may say that you never signed any such agreement. However, it will take time and money to get rid of them. I have seen cases where a foreign company takes over the distribution of a product in order to gain a competitive advantage for a competing product by purposely limiting the first product’s sales.

In part three, we will focus on international finance, logistics, labor and treasury functions.

International expansion: Is your company ready?

International expansion: Is your company ready?

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Pressure to expand your company internationally can come from many angles. The opportunity to grow, competition, an employee who is familiar with a foreign market or a buyer from another country are all among the reasons we entertain the idea. Perhaps, through a series of articles, I can share learning accumulated during my 40-year international business career.

Culture

During my time in the Peace Corps, I was headed to Venezuela and imagined that somehow, I would finally learn Spanish. Instead, the Peace Corps dedicated the better part of three months of training to cross-cultural experiences. Why? As in domestic business, trust is what motivates and sells. Without cross-cultural understanding to guide behavior, it is difficult to develop trust. Language ability is just table stakes.

Market entry

You have a high degree of product knowledge and know your competitors well enough to dominate your home market. Why not enjoy consistent market share and profitability around the world? Among the things to research thoroughly are cultural differences that affect buying habits or may require product modifications. Other concerns are barriers to entry, such as labeling requirements, tariffs, logistics and protection of local companies. Often, insufficient attention is given to currency issues, financing and labor.

Research and planning are mandatory. However, the selection of the team that does the research is a common stumbling block. The tendency is to rely on people and companies that are more like us: They speak the same language, have a good understanding of the product in its home market or are narrowly focused on product marketing, even if other business issues may have an even larger impact on bottom-line profitability.

Another major decision has to do with structure. Do you create an affiliate company in this market? Is it wholly owned, majority owned or minority owned? Or would it be better to name a master distributor who will build out a dealer network? Do you acquire a local company? What does your research tell you about the impact of these considerations on profitability, market share and repatriation of profits?

One of the choices may be to initially sell to a new foreign market through one or more distributors to learn about the market before investing heavily in another structure. This is a logical decision. However, attention must be placed on the selection of the distributor and the contract that describes the relationship. Some countries have protections for a local distributor that make it very difficult to end the relationship or to set up competition for the distributor. Often, criteria such as not reaching a certain volume of sales become disputes involving each party accusing the other. Be aware that in some cases, a distributor can gain the rights to sell your product if they at one time sold the product but your documentation is faulty. This is the case even if you have entered the market yourself or named another distributor. The courts will either favor the local company or tie you up for years. Obviously, you need a credible third party to do background and credit checks.

Joint ventures and acquisitions present alternatives to naming a distributor. If culture is always important, culture as a factor is extremely important in a joint venture no matter which party is in the majority. All too often, the partner coming in from another country ignores what made the local partner successful and attractive in the first place. The mandate to adopt home market policies and strategies leads to underperformance. Of course, the worst case is when the company coming from the outside names an executive with no international experience as their eyes and ears in the new market. If the idea is to make the joint venture a clone of the home country company, don’t do it.

That leads us to a wholly owned company. For some products, this is a great choice. It affords quality control, assures that multinational clients are treated as they would be treated in the home market and provides greater protection of intellectual property. In some cases, it may also provide opportunities for greater market access to regional markets and access to human resources. The main obstacles are the investment needed and the difficulty of adjusting to the local market.

In part two, we will have an in-depth discussion of the management of international operations, logistics, labor and treasury functions. Stay tuned.

Leverage community connections for your business with these six expert strategies

Leverage community connections for your business with these six expert strategies

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For most small businesses, initial growth happens locally. Often, business leaders begin to spread the word through family and friends, who then tell their connections in the community. These word-of-mouth referrals can lead to new customers, vendors, partners, employees and more for a small business.

The members of South Florida Business Journal Leadership Trust understand the importance of tapping into their local community to fuel growth. Below, six of them share their best tips for leveraging local resources as a business owner.

1. Seek talent from local universities.

We often look no further than our own backyard universities for talent to grow customers and resources. It is often advantageous, efficient and effective to first invest in hiring those with local degrees who already know community dynamics and potential customers and have strong relationships. They can leverage their own networks and local insights to support business expansion in the marketplace. — Jeffrey Bartel, Hamptons Group, LLC

2. Be active among your alumni group.

As we have seen, the use of influencers has been popular among local early-stage businesses. However, a referral from people who know you and your business well is much more powerful. Additionally, while influencers are strong promoters of consumer goods, your alumni group has a range of members that most probably is broad enough to include most types of business. Become an active club member! — Dennis Custage, Liquid Capital

3. Partner with local nonprofits.

One way that we’ve connected with our community is to partner with local nonprofits. This has allowed us to make strong community connections, increase brand awareness with local business leaders (many of whom sit on the board of these nonprofits) and support organizations that are tackling important local issues. — Lauren Fairbanks, S&G Content Marketing

4. Actively connect with like-minded people.

Whether finding new team members or locating your next customer, working with like-minded people is always a recipe for success. Our team does this by giving back. Seventy percent of our employees are actively involved with local charities, collectively contributing nearly 2,000 hours of community service per month. As we meet similar people, it is only natural that synergies are made. — Jeremy Straub, Coastal Wealth

5. Implement a corporate social responsibility program.

I’ve always believed in giving to give — not to get. Incorporating a corporate social responsibility program is a fantastic way to help a business grow locally, meet new talent and possible customers, gain introductions to new business referral sources, and much more. Plus, it feels good and is a win-win all-around! — Durée Ross, Durée & Company, Inc.

6. Participate in civic and charitable groups.

About 12 years ago, I relocated to South Florida to assist with a business that was just past startup. We wished to let it be known we were joining the business community here, so we looked to get the company involved in civic groups and charitable events. As an unexpected benefit, our participation became a source for employment recruiting and relationships that helped our business grow. — Michael Sluka, B2B CFO Partners

Why company leaders need to think like outside investors

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‘One size does not fit all’: How one alternative financing firm went beyond factoring

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Toronto-based Liquid Capital Advance Corp. evolved into much more than a recourse factoring shop

Nearly six years back, Jonathan Brindley, founder of Toronto-based Liquid Capital Advance Corp., set out to develop a factoring company.

The goal was to create an entity that would provide small- and medium-sized businesses with the financial resources they needed to tide them over before their receivables were paid. “It’s an attractive business because factoring suits so many companies,” said Brindley, a chartered accountant turned entrepreneur, at the time.

In return for a small fee (in the two per cent to four per cent range), Liquid Capital would advance 75 per cent to 85 per cent of the face value of the receivable with the balance retained until the invoice was paid. Once the funds have been repaid they can be redeployed again. Ideally the goal is to recycle the funds every 30 to 90 days.

But Brindley’s business evolved into much more than a recourse factoring shop. It now defines itself as “a full-service working capital and trade finance company,” that also provides “asset-based lending, purchase order financing, inventory financing and equipment leasing.”

Click here to read the rest of the story published in the Financial Post.