October 2012 “The Issue” Newsletter
Entering the U.S Market
Foreign companies and immigrant entrepreneurs find capital and wealth in the U.S
by Bob Weis, Managing Partner, CFOs2GO Partners
I think that it was 1999 when I received a phone call from a Dutch venture capital firm looking for a local consulting CFO who could help one of their portfolio companies execute on its planned U.S. expansion. While established in Europe, the still entrepreneurial management team sought success in the large U.S. marketplace and along the way access to the well developed U.S. capital markets. They were to be unimaginably successful and it began a flow of foreign companies and immigrant entrepreneurs for our firm that helped shape an International practice that utilizes consulting CFOs to customize broad finance, accounting and administrative solutions that can quickly scale with success or contract with temporary setbacks.
A recent study prepared by the National Foundation for American Policy that was commissioned by the National Venture Capital Association provides an objective overview of the success that immigrant entrepreneurs have had in the U.S. economy. Here are some of the highlights:
- Over the past 15 years, immigrants have started 25% of U.S. public companies that were venture-backed.
- The current market capitalization of publicly traded immigrant-founded venture-backed companies in the United States exceeds $500 billion.
- Immigrant-founded venture-backed companies are concentrated in cutting edge sectors: high-technology manufacturing; information technology (IT); and life sciences.
- The study found 40% of U.S. publicly traded venture-backed companies operating in high-technology manufacturing today were started by immigrants.
- The largest U.S. venture-backed public companies started by immigrants include Intel, Solectron, Sanmina-SCI, Sun Microsystems, eBay, Yahoo!, and Google.
- The proportion of immigrant entrepreneurs among publicly traded venture backed companies is particularly impressive when compared to the relatively small share of immigrants in the U.S. population. Today, immigrants encompass approximately 8.7 percent of the U.S. population and represented only 6.7 percent of the population in 1990.
And the flow of foreign companies and immigrant entrepreneurs continues to the U.S marketplace from ever increasing sources of home countries including Australia, New Zealand and Eastern European countries. Last week, an immigrant entrepreneur from the Slovak Republic visited us to begin the execution of his business plan into the U.S.
I thought back on the past almost 14 years of our serving foreign corporations and immigrant entrepreneurs and developed a list of Top 10 Concerns that foreign corporations and immigrant entrepreneurs identified as they entered the U.S. based on the services requested.
Most initial concerns are specific (e.g. can you help open a bank account, can you help set up payroll and benefits, provide bookkeeping and tax related services). We almost always request a business plan that ensures solutions that are coherent to the total business plan. We don’t want to build a foundation for a “one room house” when the company is a building a “skyscraper” … and vice versa. I have organized the specific concerns under categories.
Concern #1: Advise on where to anticipate problems in adapting to foreign business operations to U.S. laws and practices? What strategies & tactics need to be changed? What are our obligations? How much will it cost?
- Identified distribution practices (“Point of Sale” advertising) successful in Europe that would have established tax presence (nexus) in virtually every locality in the U.S. before the first U.S. product sale; thus, this online seller of products would be at a competitive disadvantage as competitors were not required to charge sales tax as they did not use this point of sale distribution practice.
- Identified importing practices for a manufacturer that would not be successful in the U.S. including missing government clearance for high tech equipment importers.
- Identified employment and capitalization strategies successful in parent company’s home country that were incoherent to immigrant entrepreneur’s VISA application requirements.
- Identified employee stock option plan successful in the parent company’s home country that would result in ordinary income treatment to employees instead of the preferable capital gains.
Concern #2: Set up banking relationships including bank accounts, merchant bank accounts, lines of credit, and letters of credit.
- Worked with the incorporating attorney and the CEO to understand the issues that had made setting up a U.S. bank account difficult. Navigated numerous barriers that had been road blocking the company, and executed on a strategy to set-up both corporate and personal bank accounts.
- Worked with CEO in leveraging relationships in home country to open up bank and vendor financing here in the U.S.
- Worked with CEO in developing full merchant banking capability that was previously limited to PayPal.
Concern #3: Set-up single or multi-state U.S. (and in some cases international) payroll with benefits and human resource programs that are locally compliant to regulations and competitive in the marketplace.
- Worked with V.P. of Sales to reconcile standard job descriptions against market compensation studies as well as conversations with local recruiters to develop compensation packages that achieve hiring objectives.
- Set-up multi-state payroll with benefits including medical, dental, vision, disability, life and travel with human resource practices documented in an employee handbook.
- Worked with the EVP of Human Resources to revise the global employee handbook to comply with local, state and federal U.S. regulations and practices.
- Set up policy and procedures for city payroll taxes in San Francisco and New York and managed successful audits.
Concern #4: Identify and manage U.S. compliance reporting requirements including tax and regulatory agencies.
- Review annual operating plan and corporate documents before developing reporting requirements list including business registration, secretary of state office, payroll tax by state/locality, independent contractors, department of labor, transfer pricing and income tax reporting.
- Developed U.S. sales tax and Canadian GST/HST practices for company penetrating U.S. and Canadian markets and provided initial outsourced bookkeeping until full time staff could be justified.
- Identified the Transfer Pricing risk in the business plan and developed a proven Transfer Pricing policy that accomplished objectives.
Concern #5: Local representation to respond to communication and manage regulatory/compliance problems.
- Eliminate penalties and interest by timely responses to tax authorities and regulatory inquiries and notices.
- Managed Internal Revenue audit of three years of U.S. income tax returns including transfer pricing agreement.
- Worked with Corporate Counsel and the CFO to review Department of Labor complaints and develop a successful response. Evaluate and redesign job descriptions to avoid future reclassification risk and future exposure to overtime regulations.
- Reviewed Form 1099s received, identified and corrected $15,000,000 of payments incorrectly associated to the U.S. subsidiary.
- Researched and developed a pragmatic policy to assist a U.S. ex pat on assignment in Argentina paid in local currency (pesos) after currency control rules changed. (ex pat could only convert up to 25% of reported income into US dollars and therefore could no longer meet her contracted U.S. obligations such as mortgage and student loan payments)
Concern #6: Provide rapid access to the E-2 Investor Visa Program for foreign investors to temporarily live and do business in the United States and EB-5 Immigrant Investor Visa program for foreign investors who would like to permanently live and do business in the United States.
- Worked with CEO and attorney to understand the issues and prepared a successful business plan that included mergers and acquisitions of existing businesses.
- Worked with the CEO and outside immigration attorney to organize a business plan that both produced a conditional VISA for the immigrant entrepreneur CEO as well as a useful operating plan that produced a Green Card at the end of the second year.
- Worked with the CEO and immigration attorney to manage supplemental time sensitive information requirements of European based U.S. consulate office.
Concern #7: Provide direction and/or support to technical accounting issues including working with outside financial auditors.
- Worked with the company’s accounting staff to produce Qualitative Impairment Test with impairment determination and policy to administrate purchased Goodwill for a foreign company that purchased its U.S. subsidiary.
- Coordinated evaluation of the existing stock option plan to ensure compliance with the outside tax counsel and administrated the stock option plan including at least yearly 409A Valuation as well as preparation of the FAS 123R calculations prerequisite to the stock compensation expense journal entry.
- Worked with the accounting staff and outside auditors to complete the footnotes to the company’s “reviewed” financial statements.
- Worked with the CEO in developing and executing financial due diligence on purchased U.S. subsidiary.
Concern #8: Provide general bookkeeping and accounting services for the U.S. subsidiary either on or off premises.
- Designed a chart of accounts and set up web enabled books and records for the corporation that was accessible from overseas home office to support filed tax returns.
- With the help of the EVP of Sales, developed invoicing practices for customers and cash disbursements practices for expense reports from employees.
- Prepare semi-monthly departmentalized payroll journal entry with full accruals including estimated city payroll taxes and 401k plan match and profit sharing for parent home office data entry.
Concern # 9: Evaluate and recommend financial accounting systems for the U.S. subsidiary ranging from QuickBooks to SAP.
- With the help of the parent company CFO, identified and implemented low cost, web enabled accounting system.
- With the help of the VP of Sales, implemented CRM package and developed reports.
Concern #10: Evaluate and recommend during angel and venture capital fund raising.
- Advise on pre-money valuation to determine how much will have to be given away to attract investment capital.
- Assist the immigrant entrepreneur CEO in developing the investment presentation.
We have built an extensive international practice over the last 13 years, and have addressed the overwhelming majority of issues facing international companies seeking to do business in the U.S.