In this episode we talk with Teresa Gordon, CPA, CGMA, Shareholder and International practice lead at Clayton & McKervey. Teresa works with global companies expanding to the U.S. Her team offers an array of services to match the unique needs of foreign-owned subsidiaries as they establish and grow.
Podcast Transcript:
Teresa Gordon:
I’ve seen over the years a lot of successes to emulate and a lot of failures to avoid when it comes to international expansion. And the size of the US market is so attractive, but a company has to still plan its market entry carefully so that they set themselves up for success. So here’s some of my recommendations along those lines. So first, I think it’s important to think about why you want to access the US market. For example, a company, a foreign company may already have US customers that they’re servicing from outside the US, and sometimes these customers are pushing you to enter the US market, to have boots on the ground, to have a closer US presence for them to interact with. But you have to think about, can you grow faster if you’re operating in the US and what that would mean for you as a global business to have more of a presence.
Also, a company may need to follow their foreign customer to the US market. And again, what does the relationship you have with your foreign customer, how will that translate to the US market? What does it mean for you to follow them there? And also some companies, they have no US customers and they really need to expand outside their market, so it’s a matter of how well you think your product or service would do in the US. So thinking through your why and where you’re starting at leads you to the next step of really building your business plan accordingly.
Speaker 3:
Welcome to the Sound of Automation, brought to you by Clayton & McKervey, CPAs for growth driven businesses.
Bryan Powrozek:
Hello and welcome to the Sound of Automation, I’m Bryan Powrozek with Clayton & McKervey, and joining me today is my colleague Teresa Gordon. Teresa, how are you doing today?
Teresa Gordon:
Hi Brian. I’m doing great. How are you?
Bryan Powrozek:
I’m doing very well. Thanks for coming on. So we’re here today to talk about something that’s near and dear to both of our hearts. I mean, having worked together for a number of years on foreign direct investment, businesses coming here to the US. So the topic for today is really going to be focused on that international expansion, whether you’re talking coming to the US or expanding out of the US overseas, our expertise is we do a bit of both, but probably more so on the inbound side to the US. So I guess before we get into the topic, though, I guess you just want to give us a little bit of your background?
Teresa Gordon:
Yeah, absolutely. So I’m a shareholder but also the international practice lead at Clayton & McKervey. I’ve been with the firm about 15 years, which is just under half of my career as a CPA. A large part of our international practice is in foreign direct investment, as you mentioned in particular for us, foreign companies coming to the US to establish a business here in this market. And these are the companies that I exclusively focus on. My clients include subsidiaries of foreign companies of all sizes, from global startups to multinational companies, really in many different industries, including manufacturing, distribution, professional services, in technology, and really companies who are expanding anywhere in the US, not just here in Michigan where we’re located. And we do offer a range of services to our clients, really from the basic bookkeeping to the more complex tax filings that have certain requirements for foreign owned companies.
Bryan Powrozek:
Excellent. Yeah, and as I mentioned, having worked together for a number of years on that area, I know that it is a much more challenging prospect than just simply coming in… If I’m a US person setting up a business, it’s pretty easy. I go to the state, I register, I register with the federal government, and then I can pretty much be off and running. But international businesses present a whole other level of challenges. So I know that the handholding services or the services your team provides are very beneficial to people looking to expand to the US.
So I guess getting into the topic a little bit, I mean there are all sorts of reasons why someone may consider an international expansion. Market opportunities, particularly here in the US there’s a lot of reshoring going on, business coming back over from China into either Mexico or United States, whatever it might be. But ultimately, once a business owner makes that decision that, yes, we need to go into a foreign market, what recommendations do you have for those business owners? And we can focus on the US, but I feel like the lessons are really applicable either way you go, if you’re expanding outside or into the US. But we’ll focus on coming into the US. So what recommendations do you have for business owners?
Teresa Gordon:
Yeah, that’s a great question, Bryan. I’ve seen over the years a lot of successes to emulate and a lot of failures to avoid when it comes to international expansion. And the size of the US market is so attractive, but a company has to still plan its market entry carefully so that they set themselves up for success. So here’s some of my recommendations along those lines. So first I think it’s important to think about why you want to access the US market. For example, a company, a foreign company, may already have US customers that they’re servicing from outside the US, and sometimes these customers are pushing you to enter the US market, to have boots on the ground, to have a closer US presence for them to interact with. But you have to think about can you grow faster if you’re operating in the US and what that would mean for you as a global business to have more of a presence.
Also, a company may need to follow their foreign customer to the US market. And again, what does the relationship you have with your foreign customer, how will that translate to the US market? What does it mean for you to follow them there? And also some companies, they have no US customers and they really need to expand outside their market. So it’s a matter of how well you think your product or service would do in the US. So thinking through your why and where you’re starting at leads you to the next step of really building your business plan accordingly. And this gives you how, you start thinking about how to expand. So one of the first questions I ask companies that are in the planning stage of expansion is what is your US business model going to be? Meaning, what is the role that your US company is going to play in that global transaction of getting that product or service to the US customer?
And why this is important is because it affects not only your operations, your resources you need, but even your accounting and reporting your tax requirements. You really have to think through how you’re going to do business there. Are you going to be a sales office or are you going to distribute a product that’s made outside the US? Are you going to set up an R&D center, or are you going to start with a manufacturing footprint? All of those have different hows attached to them. So same why, you want to get to the market and expand, but all of those different business models have different ramifications you have to plan for accordingly. Also, is your product or service ready for the US market? Do you need market research? I talked to companies, foreign companies at times that have a product that they can’t yet sell in the US because it needs some kind of approval or something that they have to go through a certification process in the US before they can sell that product.
So sometimes that’s a step they don’t know how to do or when to do it, but that’s important before you start investing money in your expansion to make sure that your product is ready for the US market. Also, how much do you have to invest in this new sub in the US before it’s up and running and self-sufficient from its operations? A new US company doesn’t have credit history in the US for a number of years, so it has to be self-funded from the global group. So thinking about that in advance before you start spending money, do you have enough to really make it all the way to that point in time? You’re projecting that it can generate enough revenue to support itself.
Another question, another consideration is to think about how will you structure your market entry? Are you going to do this on your own? Are you going to have a wholly owned subsidiary of your global group? Or do you need a partner or want a partner? This could be in the form of a joint venture with another strategic partner or it could be a distributor that you’re going to use in the US instead of setting up your own corporate structure. Finally, what resources are you going to need to operate and manage that new US investment? Where will you have access to them and do you need visas? Because that’s a process that takes some time. So sometimes when you think through these different aspects of how you will do business, you can start thinking about the timing of the different steps and the amount of money and just the structure. And all of these things leads you to the next step, which is really learning more about what it takes to really do business in the US, and then that’s really important because you can vet your business plan and revise it accordingly.
Bryan Powrozek:
Yeah, that’s interesting. I think with the companies that we typically deal with who are coming into the US, typically larger, more established businesses that probably have a lot of those resources and are thinking that this is something we need to do and have this whole plan laid out. Whereas then I think on the flip side, seeing some of our US clients who have maybe expanded into Mexico or moving outside, they may not be thinking through all those things, and just knowing all the dominoes that fall after you finally make that decision to say, “Okay, we’re coming in, we’re moving into Michigan,” I think then a lot of the things that you’re about to talk about here start coming into play. So what are some of those unique aspects that you’ve seen when someone finally makes that decision, “Okay, here’s how we’re coming over, here’s what we’re going to do.” What are some of those things that catch people by surprise or maybe are a little bit harder than they might have thought coming over here?
Teresa Gordon:
There’s a couple of things that come to mind right away, and one of them is the tax structure. Everybody wants to know, “How am I going to be taxed in the US?” And typically at the federal level, that’s pretty easy to understand, but what’s usually always a surprise, and even more so every day, is the state tax liabilities that they may face. And this is because a lot of times a company will think they’ll come over, they’ll set up in one state, say Michigan, or a lot of people talk about a Delaware corporation, and they think that that dictates where they may be taxed. And that’s not necessarily the case.
Many companies coming to the US will face multi-state taxation requirements. And this is something that not only is determined initially, but on an ongoing basis as they do business. So that’s usually a surprise to them. The US is a very large country and all of the 50 different states have not only different rules and tax laws, but also different types of taxes. So it can be a little overwhelming, but the important thing is that talking to someone like us, we can help them get an understanding, but we can also manage that for them as we’re working with them on their tax filings year after year.
Bryan Powrozek:
It’s interesting you bring the state taxes and that up, because that does, I think, tie immediately back to what you talked about before that if you… And we’ve seen companies come over that it’s like, “Oh, we’re just going to set up in Delaware because we heard that there’s some advantage to being in Delaware. Somebody advised us to go there.” But then you don’t have any customers or potential clients or anything in that area, and it really turns out you should have been in Texas because that’s where the industry that you focus on or the customers you focus on are located. So now you get these issues of… And Delaware’s not a great example from taxes perspective, but, “I’m filing taxes in New York, but I’m doing all my business in Texas where if I just had set up in Texas to begin with, I wouldn’t have that New York filing obligation.”
Teresa Gordon:
Yeah, absolutely. I think a good recommendation from a tax perspective is consider incorporating your business where you plan to have the base of your operations. Doesn’t mean it’s the only place you’ll be taxable at a state level, but it’s a good place to start. I have seen more use of Delaware lately, because there’s a lot of businesses who don’t need a physical place of business. They hire people anywhere in the US or even in the world, and they may have customers throughout the US. So sometimes a foreign company coming in might not have that set place to use that recommendation I just gave, but Delaware then is a good place to incorporate, have that initial start. They still are going to register in whatever states they’re going to have a taxable presence or economic nexus. So it doesn’t limit their taxability to that state, but that’s where I’ve seen a good use of Delaware from a tax perspective lately.
Bryan Powrozek:
Excellent. So what are some of the other challenging aspects to come in here to the US?
Teresa Gordon:
So another really challenging area to really get a handle on is payroll and benefits. So there’s a couple aspects there. One, it’s going to be different than most places in the world because we’ve got private insurance, health insurance as opposed to provided through some kind of government mechanism. So it’s going to have a different cost and different things to consider how to put that payroll benefits packaged together to attract and retain your US employees. The other aspect is going to be just the salaries themselves. Compensation tend to… It can tend to surprise people sometimes. They may have to pay more for, say, an engineer here in the US than maybe they’re used to in their home country or in other areas where they’re operating.
So I think these two things, the actual cost of compensation for the workforce that you need as well as the cost of benefits, are two things to make sure you’ve got those correctly accounted for in your business plan, because if you’re budgeting payroll and benefits based on what you’re used to in your home country, you might have a hard time meeting that forecast then, because your costs are going to be higher. The other aspect of payroll that I see is there’s a couple different types of payroll providers and it’s important to really understand what your options are so that you can find the best providers. So for example you can have separate providers to process your payroll, to provide a benefit package, a retirement package, an HR services, or you can use a PEO, that can be one provider that spans that whole range of services.
So there’s not a one size fits all, but it’s really good as an accountant, these things, we don’t provide the payroll services, but of course everything ends up in the books and records of the company and on the tax return, so it’s a good point of coordination and we can talk to a company in early stages of planning their expansion and help them understand some of these options even for other providers for services that we don’t provide but that are really closely tied to what we can help them with.
Bryan Powrozek:
And the payroll one to me as well, I mean the taxes is another one, but these issues are really… It’s not a inbound versus an outbound challenge. You’re going to have to figure those things out. Because I know even when I was in engineering and the company I worked for was moving some production to Mexico, there were issues of finding the right employees that could do the type of work we needed, finding vendors and suppliers that could do some of the secondary operations we needed. So I think that that’s an overlooked… The employee compensation payroll side of things is an often overlooked piece during that planning stage that you’re just thinking, “Oh, this is what I pay for an engineer here, but I’ll probably be able to get it cheaper there or whatever it might be.”
And then the US gets even more complicated because what you’re going to pay for somebody in Michigan versus Illinois versus Tennessee could be three completely different pay scales. So finding an advisor, someone that can help guide you through this and give you that soft landing, is probably a good recommendation. I think we’ll touch on that in a little bit as well. These things can be so complicated for any business owner to try and figure out on their own, rely on somebody that’s been through it before and knows the pitfalls to avoid.
Teresa Gordon:
Absolutely. And in today’s environment, finding the workforce that you need, as you mentioned, it could be throughout the US or even sometimes outside the US, and there’s more choices and with that becomes more options and more considerations to make. We can certainly help from the tax perspective, but we have a network of providers that we can bring in to help make the decisions on for them.
Bryan Powrozek:
And the last one on here, and I threw this one out specifically because it was always such a… It was shock to the system for folks coming to the US. Talk about how difficult it is to open a bank account here if you don’t have a US person on your payroll.
Teresa Gordon:
So this is always a struggle, and I think it’s… Banking in the US is different than other places. There’s a lot of banks, they have different platforms, and they have different processes and procedures, even though they have the same know your customer regulations that they have to meet. So I think that understanding who is going to be involved in the bank account, who is going to have signing authority, who are going to be the officers, all of those things initially, you can have the same set of circumstances, but at different banks you can go through different processes that take different amounts of time. So what we like to do is find out what kind of accounting software are they going to use, something like QuickBooks, how are they going to pay their bills? Are they going to use a bank platform or some other application like bill.com? Who are going to be the officers?
We try to help walk through the circumstances, and then there isn’t any one good recommendation, but we can point them to a couple different options, including multiple brick and mortar banks, either close to them geographically or sometimes a larger branch that might be located elsewhere. Also there’s some newer online options. They’re not truly banks, but they serve some of the same functions and they still have the same regulations of know your customer, but they have some different processes that sometimes you can integrate easier with the software as well as have some more streamlined processes to get that account set up. So not any one solution, but we’ve seen it all and we try to help guide in the best direction to get it set up as soon as possible.
I think the point here though is that sometimes… Without thinking about the bank from the beginning, even before you have an entity set up, sometimes you’re left in a position where you found your employee, you want to put them on payroll, but you don’t have an account yet, so you got to scramble. And sometimes then that delays things because it takes a little bit longer than you might expect.
Bryan Powrozek:
Yeah, exactly. And that’s right. I felt that the banking, just based on our experience, is a good example of one of those things that… That to me seems like a very unique to the US issue, although I’m sure it’s an issue somewhere else, but it’s one of those things that’s specific to what we’ve seen operating here in the US that business owners are going to run into wherever they go. There’s going to be one thing they’re not sure, whether maybe it’s registering for VAT or doing something else. We don’t have VAT here, sales tax in the US, but VAT in foreign countries.
They’re going to run into those unique issues. And again, better to have somebody who can point those things out to you in advance versus, and having been through this with you in the trenches, trying to get a payroll out the door the week before somebody needs to get paid is… It’s stressful for the business owners, it’s stressful for the employee. So the advisors can really help in that area. So that transitions to the next topic. If someone is considering an international expansion, who’s that team of advisors they should really be looking for to help navigate those waters?
Teresa Gordon:
Yeah, that’s another great question because there definitely is a need for a team of advisors. And sometimes that team is bigger in the US than in other countries because there’s more separation of services. Some other countries you can have legal, tax, accounting, and payroll all from one provider, where in the US those are typically separate. So I think the advisors and the team that you need really starts with economic developers. They can help you with available incentives, with site selection, which is a big deal, because the US is so big, even access to workforce and utilities. The right utilities for some types of business is important. Next, attorney, you need that attorney to set up your legal entity and for all your contracts, your trademarks, your patents, your employment agreements, those are all really important to use an attorney for. An accountant like us, from an accounting and a tax perspective, we can help you understand the tax environment, both federal and state, as I mentioned before, but also help you manage and meet all of those requirements on an ongoing basis.
Bankers, we just talked about that. It’s important to find the right fit for your business, especially being a global business, but maybe starting out really small initially in the US. Payroll and benefits, again, you need a provider that’s going to really provide you the right service, whether it’s a PEO that everything is included in one service provider, or whether you start out with maybe just basic payroll processing and add other services on is you need them. And lastly, your insurance needs. You have a new asset in the US when you set up a new business, and you have to manage the risks for that business and also understand how managing the risks in the US impacts your global management of risks for the whole group. It’s important that these advisors be located in the US and that they’re experts not only in their field, but also experienced with foreign direct investment, because that’s really important because there are some nuances, there are challenges that are easy to overcome when you work with someone experienced in FDI and in their field.
So it’s important. I’ve seen people use their advisors from their home country, some online services that can do it all, and a lot of the times I’m helping companies unravel some of the things that were done before they were talking to their team of US advisors. And lastly, it’s really important for the team to work well together and collaborate easily to really support that company’s growth. And I think as an accountant or tax advisor, we’re a great point person for that team because there’s a tax aspect to almost every one of the other services, whether it’s an intercompany agreement the attorney is drafting, there’s a tax aspect that has to be reviewed. Whether they’re sending over an expat employee to put on US payroll, there’s tax issues to be addressed that the other providers just don’t handle themselves. So there’s a lot of collaboration from a tax perspective and making sure that you’ve got that well-rounded team working together that’s going to really support the success in the new market.
Bryan Powrozek:
And I think the first group you mentioned there, the economic developers, I mean, those are really a good first step. Because I mean, number one, they will be able to help you identify, especially in the US, having worked with the teams here, they’re very good at, “Is this a good fit for our area? Do we have the types of skilled resources you would need? Or is there a benefit to being in our location versus somewhere else?” But then as you mentioned, they’ve also developed those networks of… We get connected to a lot of potential clients through the economic developers because they know, “Okay, this is the group in our area that focuses on helping businesses like yourself.”
So that’s probably a good recommendation for anybody. If you’re considering coming to the US, you’re considering going to Germany, Mexico, wherever it is, find those resources that are available because they’ll know the full gamut. But from what are the incentives that are available, what are the areas? Even in Michigan, if you’re talking North of Detroit, West of Detroit, Northern Michigan, they know the places to be within those areas. So that’s always a very good starting point to begin with.
Teresa Gordon:
Yeah, absolutely.
Bryan Powrozek:
Excellent. Well, Teresa, I appreciate you coming on and sharing your insights. If anyone is listening to this, and I know from looking at our most recent podcast downloads, we actually have quite a few international listeners, so if there’s somebody out there listening to the podcast that’s been kicking around the idea of coming to the US, what’s the best way for them to get in touch with you?
Teresa Gordon:
Oh, I look forward to hearing from your listeners. Happy to have discussions. I can be reached easily on LinkedIn or actually through our website.
Bryan Powrozek:
Excellent. Well, Teresa, thanks again for coming on.
Teresa Gordon:
Thanks, Bryan. Thanks for having me.
Speaker 3:
Thank you for tuning in. Don’t forget to like us, subscribe, and share on social. To learn more about Clayton & McKervey, visit us at claytonmckervey.com. That’s C-L-A-Y-T-O-N-M-C-K-E-R-V-E-Y dot com. We thrive on finding the solutions for you.
