Guest post written by Larry Harding

As vice chairman of Radius, I consult with organizations that are seeking to expand internationally.

“Don’t assume things work like in the U.S. and don’t take anything for granted.”

That clear-eyed bit of advice came from a CEO at a consumer goods company, in response to a survey we conducted on the topic of global expansion. The survey, done in partnership with CFO Research, asked senior executives at small- and mid-sized businesses about the opportunities and challenges of opening overseas offices. Nearly 90% of the respondents were already operating overseas (the rest were considering expansion), and nearly two-thirds (65%) expected to be increasing their global footprint within a year of taking the survey.

Even for this globally experienced group, nearly 74% of these finance executives surveyed agreed that maintaining control of international activities was difficult. In their responses, executives consistently trumpeted the importance of conducting thorough research before establishing an office, to understand the target country’s legal, regulatory and cultural environment. Those of us in the business of international expansion sometimes refer to this as the “know before you go” rule. Unfortunately, we’ve found that time and again U.S. companies, especially those new to the global expansion game, tend to overlook certain important factors during the due-diligence phase of expansion.

Understanding Your New Market’s Unique Requirements

Companies considering entry into a new market must understand that market’s unique requirements, from tax laws to employment contracts to local business customs. Otherwise it will be impossible to accurately estimate the true cost of establishing and operating a new entity. Nothing can replace a comprehensive cost-benefit analysis, no matter how attractive the opportunity in a new market appears from afar.

Most U.S. companies that have never expanded into another country will begin the planning process by developing a list of common domestic expenses — including employer social security contributions, corporate income taxes and office operating expenses — and then make adjustments to account for target-country tax laws, real estate costs and other factors. The problem with this approach is that it presumes other countries operate like the U.S. In fact, each country has its own set of complex and constantly changing laws that govern how business is conducted. Unfamiliarity with a target country’s business laws, customs and practices can expose unwitting businesses to significant “hidden” costs.

The Potentially High Costs of Terminations: Two Real-Life Examples

Employee termination costs vary significantly by country, a fact that is often overlooked when planning an international expansion. In France, for instance, terminating an employee will cost an employer the equivalent of 12-18 months of salary in severance if an employee has been on board for longer than his or her probationary period – and that’s assuming that the termination was undertaken in accordance with all the myriad different employment regulations. As a CFO of a manufacturing firm put it bluntly in our survey, “Understand how to fire before your hire.”