How the right Finance Director can develop an award winning International expansion strategy for your business- and the common pitfalls to avoid
Since the Brexit vote, there is still uncertainty on how Britain’s exit will impact UK businesses and the wider economy, but it has without question prompted many to look at how to build out their business overseas. Whether you are a company currently in a period of expansion through organic growth or via acquisitions/mergers or developing a strategy for the future, there are key considerations that will impact the success of the expansion.
To explore this further we spoke to finance expert Tushar Patel, who has managed and coordinated the strategic expansion and integration of varied businesses across global jurisdictions, to share his experience and lessons learned. Tushar has managed large scale infrastructure financing projects and holds an extensive level of experience in financial management, corporate transactions, corporate governance and compliance, negotiation and integration,with extensive treasury and risk management experience.
In this Q&A, we will be covering areas such as the main considerations when planning an expansion, identifying areas to expand, how to ensure a collaborative performance culture and alignment of business values when expanding teams globally, delivering a financial strategy that ensures adherence with legal and financial compliance countrywide and stakeholder management.
Adept at expanding and developing diverse teams across a number of cultures and business environments, while enhancing business value and impressive EBITDA climbs, it is a valuable insight into how to maximise on any opportunity and the common pitfalls to avoid.
What are the main considerations when deciding upon an expansion?
Expansion can take many forms, growing the existing business organically or acquiring a new business (related/unrelated) via acquisition/merger or partnership. There are several key macro considerations that need to be well-thought-out.
- Does the expansion fit the strategy of the business, are you chasing new markets, geographies or looking to diversify? Market intelligence and due diligence should play a fundamental part in the decision to expand a business, important clues can be gained about the market, trends, some indication about your competitors and their ambitions and risks will be identified.
- What value/return does the new venture bring, risk v reward needs to be considered, does the reward warrant the effort and headache?
- Does the business have the resources (human, technology, financial, internal processes/infrastructure etc.) and expertise to be able to undertake such an expansion, what strain will it put on the existing business? It's not uncommon for a business to be consumed by the new venture to lose sight of the day-to-day operations of an already profitable business.
It's also imperative that you create financial models with different scenarios, once you have identified what and how you are going to expand. A model will help to assess and quantify the opportunity, allow planning around funding method, track the performance and help you to understand cost drivers.
I am a firm believer that businesses can’t stand still, or they will be overtaken by their competitors, new entrants or disrupted by some new force in the market place.
Based upon previous experience, tell us more about identifying areas to expand?
Keeping abreast of economic developments, demand/supply imbalances, consumer behaviour and market changes can present some forms of opportunities or at least highlight the risk of standing still. Taking this further and preforming market research/analysis is a crucial factors in identifying an expansion strategy.
Analysing consumer markets, purchasing habits and decisions, direct and indirect competition, substitute or complementary services and products, other potential industries and finally the ever-changing macro environment can all lead to identifying market trends, target markets, target customers etc. It will also help to provide a systematic approach to identify expansion opportunities, it may even assist you in deciding not to enter a specific market or look for another opportunity.
However, the entire process can be very time consuming and may have a low hit ratio. Apart from searching for opportunities yourself, networking and contacts can also be a potential source of deals/acquisitions/collaboration, either coming from business partners or financial institutions specifically reaching out.
It should also be mentioned that most businesses grow organically but it flies under the radar, as it is not as high profile as an acquisition. The potential seems to always be driven by the team on the ground considering innovative ways to preserve the existing business position or by finding a solution to some sort of operational problem. So, the individuals closest to the business can be an invaluable source of ideas, the challenge is how to tap into them.
What should be the main factors to consider when setting up a financial strategy, such as how to ensure adherence with country legal and financial compliance.
As the portfolio was multi-jurisdiction the financial strategy had to consider the geographic and economic diversity of each location. However, some core macro principals were overarching the financial strategy, mainly, building a sustainable profitable growth portfolio, developing new revenue streams to diversify income and maintaining strategic advantage through capital allocation and investing.
At the individual location level compliance with local legal and financial regulations was essential. I believe that the key to achieving this was having the right local advisors to work with rather than trying to understand the complexities and legislation yourself to avoid fines or worse for non-compliance. Emerging market countries have very complex and convoluted regulations from ensuring that your equity investment has the right central bank sign off, to the volumes of tax code legislation etc. Initially the right advisors can assist with this but with one eye on the bottom line, regular procedural items should be brought in-house eventually. Building a knowledgeable in-house team can begin to provide benefits to the business. However, advisers should still be in the loop as regulations and laws change frequently and they are best placed to provide appropriate guidance based on their experience with other clients facing the same issues.
Can you expand on stakeholder management?
Key stakeholder management included our business partners and shareholders. They were not always strategically aligned or had the same investment horizon, making for interesting Board meetings at times. Managing expectation was a huge learning curve for me, especially when it came to dividend flows v further equity investment.
Employee management was another focus area, as the business was growing, and talented individuals were required to drive the business forward. Partnering with the Human Capital team, employees were identified from the existing business to form the basis of a talent pool, providing current and future talent for succession planning. The difficulty was ensuring that staff were engaged, motivated and had opportunities to progress within the business, if that was what they wanted to pursue.
Governmental bodies/departments required extensive management time. Building a relationship with bodies, while consulting them early and often became the key to efficiently working with them. Not the easiest to work with as they have different objectives and thought processes than a commercial business at times.
The communities that our sites were located was another crucial stakeholder. Not only did we bring positive factors like economic development, providing local employment etc. we also brought congestion in the form of traffic, potential relocation of families, noise pollution due to the development of the site and 24-hour nature of operations etc. Communication was key to engaging and partnering with the local community allowing the business to become an integral part of the community and giving back in a number of ways. This led to a sustainable and responsible investing approach which brought about social change for the communities our businesses were located around.
When expanding and developing teams globally, how can you encourage a collaborative performance culture and an alignment of business values?
Regular offsite meetings, allowed teams to assemble, build a rapport and trust with each other, debating and discussing various issues in a relaxed atmosphere. Building a relationship between the individuals was key to collaborating and cross sharing ideas, as was sharing experiences and openness of information flow. It was important to share as much information about global initiatives and results to promote a sharing culture from the top.
Alignment to business values came down to clearly communicating what the global goals and objectives were. Alignment normally took shape at the annual budgeting round when; the short-term strategy was re-assessed for the coming three years, communicating and ensuring buy in from the management teams allowed the alignment to cascade down the organization. Performance management was also aligned to business strategy and culture to re-enforce the link to performance attainment. Local management were empowered to define their own action plans to achieve these common goals, further promoting ownership and alignment.
One thing that was lacking was regular feedback or tracking of performance metrics, this was addressed, allowing management to have more insight and the ability to adjust plans to get back on track. Collectively this allowed sight of the bigger picture and value being created.
Your previous company had an expansionary programme which allowed the business to grew from 3 operating units to a portfolio of 12 businesses, spanning North and South America and the Caribbean. What were the biggest lessons learnt from this?
One of the biggest lessons was that the expansionary strategy that you set will always evolve as time passes. In the early days, the global strategy was to refocus the business into an emerging market player and chase those opportunities. However, over time more cash rich entrants appeared for assets pushing valuations higher and fewer expansionary opportunities appeared appealing or viable. Therefore, the strategy evolved to consider backward integration to seek closer links with producers, end customers and entering the warehousing and logistics arena, this allowed for revenue diversification.
It is also paramount to ensure that you undertake extensive due diligence and consult the right advisors, especially for cross border transactions. The legal, tax and compliance framework in countries can be vastly different from what you are accustom to. To further reduce some risk of entering a new geographic location, we engaged with influential local partners. More locally connected and able to call upon their network to resolve local issues. However, they will need managing like any other stakeholder.
Pulling the right team together with industry and local technical knowledge was also a big challenge. Without a core team on your side with the necessary skills, cultural, language and local business contacts, you'll be competitively disadvantaged. It can be extremely challenging to find people with the right skills, if you are setting up a greenfield project in an emerging market country, as opposed to acquiring an existing business in a developed economy.
Can you tell us about the challenges faced when leading the negotiation and closing of various financing facilities?
The main challenge for financing large infrastructure projects is ensuring the financier understands the asset/project, the unique selling propositions (especially if it’s a greenfield site) and ensuring that you are not left holding all the risk, needs to be some risk sharing between the financier and the business. Especially important is the robustness of the cash flow from the project.
An infrastructure project in a new jurisdiction, has many risks that need to be understood and mitigated as best as they can, and the language barrier can also be a huge issue as things are not always clearly expressed. As can the number of stakeholders that need to be managed as part of the structure of the deal which can be immense, managing the internal resources to assist in their field of expertise can also be a challenge and deadlines can easily be missed without stringent project management.
Can you give an example?
In one project financing, we had a number of legal challenges during the financing, as the authorisation by the country’s transport ministry for the project was open to a lot of interpretation. The company had inherited the authorisation upon buying into the project, so had no ability to make clarifications. This left the international financiers extremely concerned about the potential legal risk of the authorisation being continually challenged and even withdrawn. Mitigated to some extent by having the involvement of a Development and World Bank. It was also, difficult for some house banks to consider participation due to the jurisdiction and their understanding the legal system. So, some new financier and relationships had to be built and attracted to the deal.
Commercial risk is normally another obstacle to overcome especially for a greenfield project, as the customer base needs to be attracted. Projections for the ramp up period always come under close scrutiny and financier always like to run various scenarios and have a low case in any modelling, which should set the tone for covenant limits.
At the end of the day the financiers want to ensure that the cash generation from the project is sufficient to service their outstanding debt and the interest obligations. They will if they have to, as a last resort, step in and enforce their security over the asset/project, but they are not experts at running a business and any disposal of an asset would not achieve a very attractive price.
Foreign exchange is also a crucial factor for cross border transactions, as the construction contract will normally be incurred in local currency, but the equipment manufacturers could bill in US Dollars. The revenue generating currency needs to also be considered as this is what will be repaying the debt, so, any mis-matches could have a significant impact over the life of the debt.
One of the project financing deals I have led, won “Project Finance International – Americas Transport Deal of the Year,” a real achievement. There are numerous other challenges which would be impossible to walk through here but with some innovative thinking and a lot of negotiation, it’s possible to overcome all the issues and find a solution that allows all parties to walk away pleased with the outcome.
Is your business currently going through an international expansion or similar transformation? Or perhaps you have been a key player in ensuring
How is your business planning to operate overseas post Brexit? And what are your thoughts on the role of the CFO or Finance Director during this transition? If you are interested in sharing your thoughts do leave a comment below, or alternatively please get in touch directly at firstname.lastname@example.org. Alternatively, you can find out more about EO Executives Finance Practice here.
Tushar Patel is an experienced international Finance Director with global in-depth knowledge of both finance and treasury. Operating at Board Level, influencing internal/external stakeholders to positively impact business growth. He has broad experience of financial management, corporate transactions, corporate governance and compliance, negotiation and integration with extensive treasury and risk management experience. Connect with Tushar here.