Businesses experiencing rapid expansion do not always have the luxury of learning all the do’s and don’ts within a global landscape. Eliminate the learning curve as our experts provide a comprehensive look into how to establish or grow your operations overseas in high-demand regions such as China, India, and Latin America.
From Garage to Global:
The Right Way to Expand Globally
Ragu is an award-winning serial entrepreneur and CEO of Global Upside, which is part of the Global Upside Corporation, a conglomerate of brands providing the most comprehensive range of PEO, human resources, accounting, payroll, and talent acquisitions services in 150+ countries. Our brands service an expansive customer base, ranging from startups to the world’s largest enterprises. In his previous roles, Ragu was the CFO at ActivIdentity (ACTI) and held leadership positions in several companies including Deloitte and NetIQ (NTIQ).
Mariusz is a manager and trusted advisor with decades of experience in business development, management, and digital projects. He combines strategic thinking and an ability to ensure careful implementation and execution, including complex cross-border projects. His business development expertise span numerous countries across Europe, North America, the Middle East, and Asia. Previously, Mariusz has worked as a global business development director and has served in executive management member roles.
Mariusz: Hello everyone. My name is Mariusz Kowalski. I am a Deputy Chair of the MBA Alumni Association of the Institute of Economics; the Polish Academy of Sciences and I am absolutely thrilled to introduce you to our guest Ragu Bhargava. Ragu is an award-winning serial entrepreneur, and CEO of Global Upside part of Global Upside Corporation – brands providing the most comprehensive range of staffing, PEO, incorporation, HR, accounting, payroll, and M&A services across 150 countries. So that is about Ragu and I should add that I have both pleasure and privilege to have been cooperating with Ragu already for a number of years, it is also a very good sort of personal connection. Ragu will tell us how to expand from garage to global. Ragu the floor is yours.
Ragu: Well, thank you, Marcin, for the introduction in Polish, and thank you Mariusz for the introduction in English and the kind words. I do appreciate this opportunity to be presenting to this crowd of listeners, not just in Poland, but wherever you might be streaming from. The topic is obviously expansion considerations and when you are looking at expansion, overseas, or even domestically in a large country, things you have to worry about most is where do you go and why do you go there. The question of why is more important than where, because people expand for many reasons. For example, there are a lot of American companies that are coming to Poland, to other parts of Europe, because there is a lot of talent there. If you are looking to set up an R&D centre, you want to go to a country like Poland and build that talent pool or capitalize on the talent pool that is available. But if you are planning to set up some kind of a high-volume manufacturing facility, Poland may or may not be on your top priority list. And you might be looking at countries like China or others and we will talk a little bit more about that towards the second half.
Once you know why you want to go to a particular country, then you have all these questions about what all do you need to get going. So, if you are going to hire a lot of people, then question number one is, how do you start? You need to hire most probably a country manager or a senior manager that can help build the team and a person who will run that facility. And not just from like an administrative perspective, but also from output perspectives and R&D team might be managed by an engineer, but a sales team, if that is your centre for say, the European Union, that might be somebody who has a sales background. How do you find these people? Finding the right talent, extremely important. You make the wrong hire as your first hire. The first few hires, present an ongoing challenge and then also, how much autonomy are you going to give this individual or the set of operations. Is it going to be sort of a centralized model where the real decision-making powers reside with the company in the headquarters? Or is that going to be regionalised or decentralized where the local head has a lot of decision-making authority?
Once you have made those decisions, then you have a few ways you can go into a country. The smallest footprint you can have is a rep office. A rep office basically is one that you are establishing to do some market research and typically, the governments limit what a rep office can do in their country. There are time limits on how long you can have a rep office. For example, in Singapore, you can only set up a rep office for one-year term, and you can get a two-year extension on it. So, no more than three years can you have a rep office because the government says ‘look at some point you are going to either want to do business here or not.’ You can only do so much exploration before you actually have to make that decision and move on it.
If you have clarity in terms of what you are trying to accomplish in that country, then a branch or a subsidiary is the right answer. Subsidiary is always the best answer because to the local candidates that you are going to recruit from, the local talent pool, to the landlords, you are going to rent facilities from, to the suppliers that you are going to buy other services from, to your clients if you are going to sell locally or hire salespeople. It is sending a clear message that you are here to stay. You have a permanent establishment. You are not a fly-by-night that ‘hey, listen, if tomorrow things get tough we just pick up our bags and go’ and it is important to send that message because that garners loyalty and commitment from both sides, the buyer and the seller so you can set up a subsidiary. Subsidiaries take anywhere from one day in a country like Australia to three to six months in a country like China. And that is based on local compliance requirements and everything that you have to do to get the entity set up and registered.
There is always one other option in terms of setting up an office overseas which is what in the US is known as professional employment organizations – PEO or mostly out of the US is known as employer of record or EOR, where you can identify a candidate in a foreign country, you can put them on somebody else’s payroll, so on their pay check, it actually says the name of the employing company, but the business card, their email, address, their phone, everything and their day-to-day management and delivery of their services is managed by the client. What that does is eliminates the need to have an HR, payroll, accounting, presence, system, people that can manage that and you may or may not know about the laws and compliance requirements of that foreign country. All of that burden is being transferred over to the employer of record provider, and all you have to worry is about finding the candidate.
As you start your operations, whether it is through an EOR or through your own subsidiary or rep office, you have HR considerations. When you hire somebody overseas, you have to worry about the local laws. So just like in Poland, you could not just do an English contract, it has to be bilingual if you are a foreign employer, so that your foreign management can read and understand English and from a local perspective it is in Polish, and the local employee candidate can read and understand that. Those bilingual requirements exist in many countries – Europe, France, Germany, Russia, Ukraine, these are great examples, Japan. Countries like Singapore, Australia, English speaking countries, you do not need to worry about things. Then you also have to worry about is how are you going to pay these people, so you can engage with a payroll service to do your payroll, but how do you get the money into that country and there are countries that have serious limitations on the ability to bring cash in, like China, Serbia, Russia. You need a local bank account to be able to pay the employees. In some countries, you are able to wire the money to the employees as well as to the government. For net payroll, as well as for payroll taxes, but you have to make sure you address those needs upfront in terms of your setup so that you do not get into that position where you have an employee and it is time to make payroll, but you have no means to pay that person.
Depending on the footprint you have, it creates what is called permanent establishment or a tax presence so to speak. This tax presence is important because if you establish permanent establishment, you will have to go in and file a tax return at the end of the year. If you do not have a permanent establishment you may not need to file a tax return and comply with other requirements. Part of this is also intellectual property, if you hire contractors to do your development work in a foreign country, it is quite possible that the intellectual property that they are creating now actually belongs to their contractor and not to the company that is paying for it. You need to make sure you have proper agreements in place with the contractor so that even though he is doing work on for hire, the product belongs to the company.
Having talked a little bit about the setup issues, let us go over into the employment law and I touched on it about the bilingual requirements. And I am sure you are very familiar that in Poland as an example, employment is a matter of contract, not at-will, which is very different in a country like the US. I think the US is the only country which offers employment-at-will. So, you can walk over to an employee and say, ‘Hey, listen, we do not want you to work here for whatever reason, and you can stop coming. You can leave now and stop coming tomorrow.’ In most countries you have to give notice by contract, you have severance, extensive severance requirements and things like that. Those are considerations that you have to think about, as you think about hiring and scaling up, as well as if you have to somehow for some reason, downsize. It is not just about downsizing because of economic activity, but it could be that you have an employee that is not performing. So, if a sales guy who is not being able to sell, you are going to let him go, but how do you make that happen? There are lots of requirements around that also.
Most countries have collective bargaining agreements or works council and many times it works to your benefit, certain times it does not. For example, in Sweden, if you are party to a CBA, collective bargaining agreement, and it negates the need to deal with each employee as a bargaining unit, you negotiate with the union or the CBA and all the employees then fall under that. It does facilitate a lot and makes easier to do business and negotiate.
Working time regulations are extremely important because you have to comply with the local requirements of overtime laws and what is allowed not allowed to work. In France, you cannot work in the weekend. In California as an example, if you work more than eight hours a day and you are, what is considered an exempt employer, you are paid by the hour, if you work more than eight hours, you will be paid overtime. If you work more than 40 hours a week you have to be paid overtime. If you work on a holiday, you have to pay double time. So, all these rules that you have to worry about around what are broadly known as working time regulations, then govern so that you do not take advantage of the employees.
The right hiring process is important as well as the right exit process. This way, you are not sued for employment practices and you have, by executing to the right standard, to the right contract and the law of the country, you are making sure that there are no breach of your contractual obligations on both sides, the employee as well as the employer. Now that you have employees, you also have to worry about benefits because most employees even though in many socialist countries, you have a nice infrastructure that provides you good support, medical care, and things like that, most employees are now getting used to having what are called supplemental benefits. The social structure provides the statutory benefits, whether the employer pays for it, whether the employee pays for it as part of contribution and those are standard and mandatory and no company can get out of it. But if you want to attract the right talent, you may want to or need to offer supplemental benefits or what is also known as customary benefits. So, in technology, you might offer a lot more benefits versus say in a manufacturing environment.
Beyond employment law, there are requirements of company law and compliance requirements. For example, you need to have a registered office. It is an office address that is provided to the government for your registration purposes and things and that office has to be manned from so to speak eight to five or working time so that if somebody wants to give you notice, or the government wants to send you a message or letter, they can send it to that address, and they know that it will be received by the company or a representative of the company. In some countries like Spain, some of this is moving over to an electronic system where you have to have a registered email address and the government then sends communications to that email address. It is a much better and faster way to communicate but then again, the requirement of the registered office has not gone away in Spain. Many countries require a resident director, again somebody who lives in that country, so that if something goes wrong with the business, somebody is there to represent the company and somebody who is not a foreigner where they can just get up and go and in the country, their citizens, their businesses do have to chase somebody in a foreign country, which becomes extremely impossible and sometimes extremely expensive and sometimes impossible because of extradition laws and things like that. They are very familiar with GDPR, came out a couple of years ago and at that point, GDPR was the most stringent requirements for privacy, for protecting your PII. However, since then, many states in the US, many other countries have adopted similar regulations or are in the process of adopting similar regulations. So, when you are within the EU, you are very familiar with the requirements, but if you go into a place like California, the requirements are different. They are actually a little bit more stringent compared to GDPR. You have to worry about making sure you comply with those policies even though you are compliant in the EU with GDPR requirements.
There are tax requirements from both indirect perspective as well as direct perspective, so direct taxes or income taxes. If you are making a lot of money, you may have requirements to pay estimated taxes during the year and then through it up when you file the income tax return at the end of the year. But indirect taxes like VAT, GST, PST, HST, sales tax, and a whole bunch of alphabet soup out there. Those are applicable in many countries, and they may have depending on volume, monthly, quarterly, annual filing, and payment requirements.
Statutory audits are required in most countries because it is not an independent audit as typically done by the Big Four, but it is a statutory audit with complies to a different standard, a standard set by the government to ensure not only that the financials are properly stated, but also that the company complies with certain laws and regulations. Then you take the income tax return in the audited statutory financial statements and other things. You have to prepare an annual report that you have to file with the Registrar of Companies or the equivalent authority in that country to stay compliant with the reporting requirements of that country.
Mariusz, are there any questions at this point?
Mariusz: Yes, we have a couple of questions. Let me start with this one. Because you touched upon at the beginning of your presentation, the question of the local presence, that is important and one of the questions relates to this. And there it goes, how important is the local presence in expansion approach based on value-added resellers approach or ecosystem approach, in other words. The product is a complex tech solution, which is an intralogistics platform based on mobile robots and ideal partners, are factory automation integration present or on local markets. And in this case, partnership pack includes pre-sales support, education, the third line support, localized support materials backed by digital activities focus on building brand product awareness on targeted geographies. So, what would you say how important is the presence in such case?
Ragu: I am not sure I understand all of the questions about your particular product. But the more complex the sales cycle or the more complex your product offering, it increases the need to have a physical presence in that country. Because you can then train your people to be experts and provide them the logistical support that they need to make that sale and do a demonstration that is required or part of your sales process or show the product. If your product is a little bit more simplified, then a channel strategy or a reseller strategy works great. What you can do is you can then have somebody from the reseller’s office come to your location, or send somebody to train a team at the reseller and then you can supply them some sample product, you can supply some demo units and then they can work with local customers, local clients to buy and sell. What that does is you are getting that local expertise, because the value-added reseller has a presence, you are also getting that reputation of that value-added reseller associated with you because they might actually have the right connections in that country, in that field. So, they can garner more business than you can, sitting overseas.
Also, it depends on your strategy a little bit because some companies actually rely a lot on a channel strategy, broadly speaking, which encompasses value-added resellers versus other companies say ‘hey, we want to have a direct channel to our customers, we want to build a big sales force. We will have salespeople in each country and sell locally.’ A little bit of it depends on your product, the complexity, and a little bit of it on how you see the market, how you see you can sell into it. When you do a value-added reseller, typically you are going to pay somewhere between 20 to 50% of your top line to that reseller for his efforts. When you hire your own people, you have to set up the infrastructure, you have to hire these people you have to cover their salary whether you have a sale or not. And then you have to pay most probably some commission on that sale. All of that comes into play cost-wise.
The last point is servicing. If your product needs servicing that has to be serviced either live on-site or by shipping the product back, fixing it up and reshipping it that may or may not be possible in a direct model because you may not have the full facility but a value-added reseller may have the facility to level one tier one support, whether it is on a hard product or a software product. Software tools, software products can be serviced remotely from any place typically. That does change the outcome of how you are thinking about setting up your operations.
Mariusz: Thank you, Ragu. We have another question. We have got a couple of them but one is from a technology company with global expansion plans. The question is how should they fund their expansion? Should they go to raising venture capital in the target country, or rather first build business in the country and after demonstrating track record, then raise capital? How can we build new business in a new country if we have no credibility in this market? And the question is specifically asked with respect to the US market.
Ragu: The US market is a little bit unique in that respect because it is obviously the largest economy. The largest amount of sellers come here, want to come here because people in the US are more open to dealing with a company that has no credibility, so to speak because you are a Polish company and you do not know who you are, we have never heard your name and stuff like that. But we as Americans are very open to dealing with foreign companies or companies that can solve our problem. If you have a solution that makes sense for us, we have no hesitation in buying it, even though we might be your first customer.
How do you get there and how do you do it? Should you raise the VC fund before or after? A little bit of it depends on how much capital do you have? Are you well capitalized or are you thinly capitalized? If you do not have enough money, raising money is important because how else would you find and hire somebody in the US and manage them because you as the CEO, or you as the head of sales, may need to travel to the US, to interview, to hire, to train those kinds of things, or bring the individual back to your home country for training purposes and things like that. Raising money with VCs always helps if you have a track record if you can show that you have sales, even if they are local sales, domestic sales and in the case if you are a Polish company, if you are based in Poland, maybe having sales in the broader EU arena will establish in a VC’s mind that you do not have a product that only three people in the world need. You have a product that more people are willing to buy and consume, which means your value is higher, and you are not going to be giving up a larger piece of your equity to just raise that capital. Also, raise the capital that you think you really need.
I will give you a very interesting example, about 25 years ago to do a global expansion, whether you are coming from overseas to the US or going from the US to overseas, you needed millions of dollars in the bank. For a global strategy to be implemented, it would cost you $25 million, or some large number. About 10 – 15 years ago, that number dropped to about two and a half million, so it dropped by a 10th or 90%. Now to go into a foreign country does not take a whole lot of money. 25, 30, $50,000 you can go into any one country, and you can multiply that. You have to think about the longer-term perspective because you say ‘I have $50,000, I can go into two countries.’ But what happens in three months when you are when you have consumed your $50,000 in salaries alone or setting up the entities because as you set up your entities, it does become very expensive. Now, in the US, the PEO model is very popular in the US. So, you can just hire somebody without establishing your organization and you can sell from overseas with that local representation. It can become a nice way to enter into a market, without having to raise millions of dollars.
Mariusz: Perfect. Thank you, Ragu. You also touched upon compliance issues in your presentation. You mentioned that it is actually important to take them into account because they differ. And we have two questions, which relate to this and I will, since they are a bit similar, will address them jointly. One is about how to limit or address a risk of employment or exploiting children in so-called third world countries, which is one thing. Another question is, in some countries, professionals are actually forced to work as freelancers or self-employed, instead of being employed and having employment contracts, it is quite common in Poland. What are your views on these topics?
Ragu: First of all, at least as far as I understand that the employment of children is very common in manufacturing, or labour-intensive industries where you can put a 10-year-old to work like in farming, or clothing and stuff and things. The only way to avoid this is to know who you are dealing with because you are having somebody do contract manufacturing for you and how do you know that they are not employing children to do the production of your goods? If the price is very low, compared to other suppliers in that country that there is something not quite right. If it is too good to be true, it is most probably too good to be true. They are cutting corners, employing children, whatever they are doing to make that happen. The best approach is to go visit their site on a regular basis. Depending on the volumes, you may even put somebody on-site to monitor that on a regular basis. Somebody in that country who is your procurement specialist, who is not just controlling the quality of the product that is shipped to you, but also watching out who is producing that product. Is it children? Is it adults? And are they properly being treated or not? That is one way to think about it. The other part of employing people not as employees, but as contractors, or freelancers it is kind of the same issue. It is a philosophy that you as the owner, the CEO, the executive of the company wants to drive.
For example, at Global Upside, we have about 1000 people working for us in about 50 – 60 countries and our philosophy is, ‘hey, you want to work for us? You have to be our employee. We do not employ contractors or freelancers.’ From time to time we end up doing that just because we need some development effort done on a particular thing where this person, we do not need him full time, we just need him for a month or two months. So yes, ‘come on in, develop the product and you are going to leave in two months.’ But that is a very short-term project, not somebody that we are thinking like, ‘hey, you are going to work for us for the next five years or a long-term basis.’ It is a top-down approach in that respect of managing and dictating how you want to employ people. A little bit of it can be pushed back from the freelancer, but typically, their ability to push back is very limited because you need a job and the company says, ‘Hey, I will pay you this but you have to work as a freelancer.’ What are you going to say? No? You need a pay check one way or the other. It is really the employer’s responsibility to ensure that we are treating the employees fairly, employing them properly, and contributing to the social charges, things like that, that you are required to do.
Mariusz: Very good. Speaking about compliance, you also mentioned data protection, which can be a major issue and we have a question related to data privacy. The question is, how do you deal with data privacy when entering the US, and potential liability related to it? So, let us assume that your product will process consumer personal data, there is security incident and other means to limit legal responsibility. Should we buy insurance for instance? Or where would you start?
Ragu: In the US, you can get privacy-related insurance for hacking and things like that where it is improperly lost, you get that insurance. But before you get to that, it is really important to understand what information are you gathering? And what are you doing with it? Because a lot of data privacy violations are coming about where some of them are because your server got hacked and somebody stole the data and now, they are selling it to the highest bidder out there on the open market. But what companies are doing is, so Mariusz, you and I have known each other for 7 to 10 years, I could take your data and sell it to somebody like, ‘Hey, I know this guy, and you can sell him these products.’ And if you start doing that, we are in violation of GDPR because we did not collect your contact details. I have your contact details like your address and your phone number and email address. So, again, what are you collecting the data for? What are you going to do with it? Sites like Google, Yahoo, and lots of sites collect a lot of data of individuals, your iPhone collects a lot of data about yourself that they are literally using it for marketing purposes and selling to other marketers. That is where you have a higher risk. If you are just using it to service, so we use Mariusz’s information to service him, stay in touch with him, contact him when we need to contact him. That is all business-related between him and us and that does not violate GDPR. Other than if he says, ‘Hey, listen, I want you to forget me, I do not want you to ever contact me take me off your do not call list,’ yes, then we will have to comply with that request.
Mariusz: Thank you, Ragu. We also got a few questions on more of a general nature. One is how to pick a country for expansion? Is there any advice that you would give to somebody who is considering where to expand?
Ragu: I cannot give you a blanket advice that you should all go to Ireland or go to the US because that just does not work. Like I said, we have a 60-country footprint. How did we get to that? You have to see the need and does the need exist in that country for my product or services? Or is there something in that country like a natural resource? I am a copper mining company, is there a copper in that country or not? If not, do not go there because you will not find it. It is both what are you going to do in that country from a sales perspective, as well as what are you going to get from that country in a supplier-buyer perspective? What is the ability of that country to scale up? There might be some small copper mines in Mali as an example and you are looking for a very large copper mine. So, going to Mali still does not satisfy your need.
If you are looking to build a Java in technology team and your plans are to have 3000 engineers working for you, going to Romania might not help because Romania does not have 3000 java engineers, by the way, that was just an example. You have to evaluate that, do some market research on what it is that you are looking for and which country can offer that.
One of the things that we do with our clients is because we are connected with the economic development bureaus of many countries, when you come to us and you say, ‘Hey, listen, I have this kind of a need, I am trying to figure out where to go?’ We have some knowledge base and stuff to help you but then we say, ‘Oh, your options might be the US, Canada, and Singapore.’ So how about we bring in the economic development bureau representatives of these three countries and have them pitch why it makes sense to come to that country or not. What is happening is because these bureaus are actually funded by the government, they have access to a lot of research. It does not actually cost you any out-of-pocket money to get them to come in and present to you. They understand your situation, they come and present, they can even do a competitive analysis of how does Canada stack compared to the US? What are the benefits of going into Canada or going to the US? This way you can make more informed decisions about where to go and how and why?
Mariusz: Thank you. I have a question myself. We are talking about expanding, so let us assume that ‘for now my company operates in a single country and hopefully we expand to a number of countries.’ So how does it, in your experience, affect the systems and processes? What does it mean to your accounting, payroll? You operate in one country and then suddenly you are in a number, so how do you prepare for this? How do you handle this?
Ragu: That is an interesting question because when you are in one country, you know the rules and regulations. You can understand them well, you can go talk to your chartered accountant or your CPA as they are known in the US, certified public accountants. You can go talk to them and understand what you need to worry about, you understand all of the compliance requirements and all of the accounting requirements. But the rules from country to country change so drastically. In particular, if you are thinking of the US, I jokingly tell people that if you can tell the IRS, the internal revenue service, that your net income was a million dollars, and here is the tax on it. Without keeping a set of books there is no requirement in this country to keep books. There is no law that says you have to maintain books. If you need an audit or if you are going public and those kinds of things then obviously the requirements kick in and those are requirements dictated by the stock exchange, not by the government of the US.
Most countries do not have that, you go to France, Brazil, China, India. India actually requires you to keep hard copy originals. Whether you have a soft copy or not it does not really matter. In the US, you come to our office, you have zero paper. We are a paperless company, our contracts with every client, with every vendor, with everybody is paperless. We docusign everything and obviously, there are advantages and disadvantages of every system but beyond that, you actually have to figure out payroll for example. Because you are going to have people in that country, how are you going to pay them? The payroll rules, regulations, deductions, how do you pay the employees, how do you pay the government, everything is so different.
In the UK, you are required to, for example, provide mandatory pension plans. In France there are 15 different types of taxes and each tax even though they might be pennies has to be listed on a pay stub. In the US, there are three types of taxes, payroll is easy – you pay twice a month typically and on the 15th and 31st or every two weeks whatever that might be and it is a piece of cake and the government does not care who pays, how you pay and everything. They just want to collect their share of the pie. In the UK, you cannot make the pension payment without having a local bank account, so creates challenges with that and that is the output issue. How do you compute that? Do you know how to compute it? The deductions and what happens when the rates change when the government decides ‘oh we are in a pandemic and we are going to reduce the tax burden on the citizens.’
There are requirements around management accounting, you are sending a million dollars to the US every month. Do you know where it is going? So you need to have reporting structures built in to your back office to say ‘hey I sent you a million dollars what happened to it? Where did it go? Where are my revenues? What are the revenues looking like? Or am I making margins, am I making profit or am I just losing money and I will be out of business in three months. Or this is a great investment or expansion in the US, let us go more.’ So, those are all requirements that you have to worry about. We talked a little bit about corporate income taxes and things like that or VAT, GST type taxes.
Again, you need accounting records to make sure you capture that in compliance with those local rules and regulations and then report that accordingly. In the US there might not be extensive requirements but you still have to worry about it if it may apply to you, obviously, you need cycles on policies, processes, procedures on your accounts payable cycle so that somebody does not send you a fake invoice and you pay it. This happens very regularly in the US, where you get invoices. People have figured out ways to download lists of companies from government websites, they buy them and then they will just send an invoice. “Oh, here is your invoice for compliance with the California state laws’ and you just pay it and they ran away with your money. They did not do a thing for you and the state of California charges only $25 fee and you can go to their website and do it in 30 seconds. But did you know that? No, you did not. Because you are from Poland or from a foreign country or why even foreign country, you are from New York, the other side of the country for us and how would you know what the California requirements are?
Having the right service provider, having somebody who understands these requirements as they apply to your business and catering to it, and taking care of that – extremely important. Hopefully, that answers the question Mariusz.
Mariusz: Yes, absolutely. Thank you and just to continue this a little bit, so let us assume that the company started to expand, we are growing and experiencing rapid growth and to the extent that we are looking to make business acquisition. If we talk about mergers and acquisitions, what would you highlight as a potential challenge, when you do a cross-border acquisition? When do you want to buy a company elsewhere or even a global company?
Ragu: We have talked about a lot of these requirements as to expansion. So, you are going to a foreign country and you are setting up your own operations and now you are turning it around and saying, ‘hey, I know the US is a good market for me, I have this competitor. I will just buy them out and tomorrow morning I will have my own operations, I have the capital needed and everything.’ It will create some very different challenges for you. As an example, there are multiple ways to acquire a company. You can just go in and buy their client list or their employee base or broadly speaking, their assets. On the flip side, you can buy the stock of that company. Then what you are doing is you are getting not just the assets, the client list, or people or manufacturing facilities you are actually getting all the liabilities associated with it. You need to make sure you do proper due diligence to make sure there are not liabilities that you are not aware of and you are not accounting for in your purchase price. All of a sudden you may have a 2 million, or 5 million, or $50 million liability that you had no idea post-acquisition. Guess what? You are going to have to pay it because now you own the company. There are also issues about how do you acquire it? Do you want to form a holding company that goes out and buys the target and you are part of that holding company structure or do you just go straight out and buy that company?
A lot of this is things that you have to look deal by deal, structure by structure to say how do you figure that out. How will you account for this company once you have the acquisition completed? Do you have a shared service centre in Poland that you can service the US operations of this company or will you need to maintain that separate division in the US to provide that back-office services that you need? We talked about the centralized decentralized concept earlier on and this is along the same lines of you want to centralize it in Poland or do you want to decentralize it in Poland, in the US. Or maybe create a shared service centre in some other geography like the Philippines or some place or India.
If you are buying a division of a company which happens a lot when private equity firms go out and buy divisions of large companies, they have what is called a transition services agreement or TSA which says, ‘yes, we understand we are going to sell it to you on July 31st. You will own this but for the next one day, one week, one month, one year we will provide you these support services because yes, you have bought this division but you do not have the ability to take it over.’ So, depending on what the TSA says if it is a one-day TSA you have a bigger challenge versus if it is a one-year TSA because you can build everything to cater to that. So, you have to evaluate all of that upfront as to how are you going to accomplish that. As it relates to people and especially if you buy the stock it is a lesser of an issue because the people are still employed by the same entity, they still have the same benefit plans and everything in place.
But if you are just buying the assets which include the team if you are buying them now all of a sudden on July the 2nd or July the 1st they are employed by some other company the buyer and most countries have this rule that you cannot take somebody and change their terms and conditions just because you bought the company or bought the assets. You have to maintain them at the equivalent level not just in terms of cash compensation but also in terms of all the benefits. For example, we had a situation, we were helping one of our private equity firm clients, they were acquiring a very large division of Dell. Dell at that point had 110,000-120,000 employees and of which, I do not remember, how many they had in the UK but the client was buying about 300 people in the UK were going to come over. They were in a shared facility with Dell and that shared facility had a gym as they were going to move out, they could not rent a place that had a gym in it. How do you make it whole? Then they had to figure out what is the membership for a gym that was nearby and they said ‘okay, you can become a member of that gym and we will cover the cost.’
That is keeping those people whole because they had that benefit before you can just take it away. You may have to worry about insurance non-insurance plans. Insurance plans – health benefits, things like that and non-insurance plans like child care vouchers, or meal vouchers, things like that. You have to procure those under your umbrella now and make sure that you provide those. Payroll continuity applies because at the end of the month especially if you have a zero-day TSA or one day TSA, at the end of month you may have to make payroll and how you are going to do that? Then whatever the local quirks might be because the UK is different than the US, different than Singapore, different than China, and all of these matters. For example, in China when you do an asset purchase the seller has to pay severance if the employee requires it. The next morning, they show up and work for the same company, the buyer and they just got a big pay-out for no good reason but that is the law of the land and you cannot violate that – local quirks. Colombia is similar, that you cannot terminate somebody without paying severance, so you cannot transfer their employment. How do you do this? And this again goes back to that concept of having good advisors, people that can help hold your hand and guide you through that.
Sometimes you have to worry about these from an employment-employee perspective you have to worry about CBAs and works councils and unions because they have the ability to turn down the acquisition. They just say, ‘hey in Sweden you cannot do this.’ So, now what are you going to do? You cannot buy those people as part of this deal. Those are some of the challenges and I know we are going to be running out of time here in the next five minutes I just rushed through that but there is a lot more to this issue of mergers and acquisitions.
Mariusz: Thank you. We have one more question because we talked about acquisitions, expansions. Now, a question is about finding the right producer, so it is like a production company that wants to order. They have something to produce, they want to find a good producer and order this abroad. How would you do this? How would you find, look for such a producer?
Ragu: So, when you say producer, I am thinking you are talking about hard goods correct?
Mariusz: I think it is hard goods. Yes.
Ragu: When you are procuring hard goods from a manufacturer and China has been the manufacturing country for a great part of the world, for some time, 10 to 20 years. Even though that is starting to change a little bit but when you are trying to procure something from China, the Chinese government, if you go to their local consulate website you can find some resources where they can help you put in touch with that manufacturer of that goods. Because you do not know who to look for in a country with over one billion people, millions of businesses, how do you find the right supplier? Beyond that as you get a list, you can do some diligence on the supplier or the producer, manufacturer by talking to that existing customers, by getting some samples of their product. The samples may or may not work for you because if Apple wants to get the new pro manufacturer of iPhones well, nobody else manufactures it but Foxconn. How do you get that? But they might be manufacturing for Samsung or somebody or Google and you can say, ‘hey, send me a product of that type and then we can evaluate from there.’ But a lot of diligence, a lot of site visits, things like that, their ability to scale, their ability to produce to the need that you project – you need a million units a month or do you need 10 units a month. How long of an effort? How much of an effort is it? And what we see very common is people putting procurement people in the country of manufacture so those people because they are local they have the right connections, they have a little bit more insight into what the local market holds and does and that allows them to have a better procurement cycle, better system process.
Mariusz: Thank you, Ragu. We have the last, final question namely about possible expansion destinations. Are there any emerging top expansion destinations, any countries that, for instance, after COVID, emerged as interesting new markets. Do you have any views on that?
Ragu: Yes, absolutely. Because we help companies expand overseas as well as address domestic needs, we get a lot of insight from our clients as to what they are looking for to go and why or why not and if they switch their destinations why did they do that? Let us talk about a little bit of pre-COVID, some of the most popular destinations were China, we talked about that. UK, western Europe was very popular because it is a good market for clients, for companies to sell and stuff so expansion can happen not just for procurement but for sales purposes. And India because India has been providing a lot of high-end talent in the service business more so than in the manufacturing business. Now, since COVID and some of it is very recent with this China exercising control over Hong Kong and stuff and governments aligning against China, what is happening is it is creating that political instability in that region and Hong Kong was a good destination also but it is creating instability in that region. So, what companies are now looking at is countries like the Philippines, India. India has risen up quite a bit in terms of importance. Philippines, Vietnam Thailand, Taiwan which was actually a good destination, people are a little bit concerned about it just because again that conflict with China that they have ongoing. People are trying to distance themselves from China a little bit and go into some of these other countries from a manufacturing perspective and India is transitioning into becoming a manufacturing economy supplying to the world versus just supplying domestically.
Mariusz: Perfect. Thank you, Ragu and now over to Marcin.
Marcin: Thank you for your presentation. The topic is very complex and what you said is very practical surprisingly and I hope that some of our attendees will be able to apply this knowledge in their own businesses. Also, I would like to thank our attendees for asking questions and thank you once again for joining us in the webinar and we hope to see you sometime soon.
Ragu: Yes, thank you for the opportunity and thank you to the attendees for listening and asking questions and please do share my contact details. If anybody has any question that they still did not get answered or want to dive deeper into any of these points, I will make myself available for that.
Marcin: Okay. Thank you very much.
Ragu: Thank you, guys.
Mariusz: Thank you.