Ask These 5 Questions Before Acquiring a Foreign Firm

If you’re eyeing a potential acquisition abroad, be sure to do a thorough background check—and then a bit more

Allan Britnell

 

 

Any acquisition requires complex layers of scrutiny to make sure a deal doesn't collapse, or worse, cost you your company. If you're considering making a purchase in a different country, the associated risks are even greater.

So before you launch into an overseas buying spree, here are five considerations to add to your due diligence checklist.

1. Is everyone using the same accounting system?
When it comes to transnational finances, don't assume anything. While math may be universal, accounting systems aren't. "It's almost as if some countries are a generation behind in terms of accounting practices," says Vince Simonelli, a partner in Collins Barrow's Transaction Advisory Services group, who has worked on more than 50 buy- or sell-side due diligence projects for the accounting firm. Overseas accountants may have different interpretations for how to recognize asset values, for example.

These issues can be compounded when the deals are conducted in a foreign language, so it's imperative to hire highly skilled translators. Even when accounting practices are more standardized, key terminology can still vary. In some countries, for instance, receivables and payables are referred to as "debtors and collectors."

2. How much taxes will you pay?
If you thought interprovincial GST/HST was complicated, wait until you do business abroad.

"You need to look at the tax environment and the country-specific liabilities related to taxes," says Simonelli. "For example, in France, there are particular pension obligations that the government imposes on companies that you wouldn't expect in Canada, so you have to look for that liability being recorded."

Foreign ownership (by you), may also impact existing agreements, such as negating work permits for foreign workers employed at the facility.

3. Are you able to hire locally?
Government agencies such as the Department of Foreign Affairs, Trade, and Development can help you get up to speed on overseas trade issues. Even so, "It's critical to use a local law firm," says Simonelli.

While you may plan on moving part of your core team to the new operations, you'll still need local contacts onboard as well. "Supply chains are often built on relationships," points out Simonelli. "If one of the guys in the chain doesn't want to work with you for whatever reason, the whole chain collapses."

4. Are you familiar with the local culture?
What you may think of as standard business practices, such as how you handle loans or make government payments, can differ from country to country, reinforcing the need for local legal advice.

And while most phases of an acquisition can be done remotely, onsite visits are a must. While there, be sure to familiarize yourself with the cultural norms—a faux pas could jeopardize a deal. In Japan, for example, there are customs around presenting and receiving business cards. Casually accepting someone's card and writing details of your meeting on the back would be viewed as a terrible insult.

5. Do you know how to handle bribes?
In many parts of the world, bribes and kickbacks are considered part of doing business.

Regardless of where you are, Canadian law—specifically, the Corruption of Foreign Public Officials Act (CFPOA)—still applies. In January 2013, Calgary-based Griffiths Energy International, an oil and gas company with operations in Chad, was charged under the CFPOA and fined $10.35-million for making a $2-million payment to the wife of Chad's ambassador to Canada.

One tool to help prepare yourself for the level of bribery and corruption you might encounter is the website for Transparency International. The organization releases an annual Corruption Perception Index ranking the level of public sector corruption in 177 countries. The 2013 list will be released December 3, 2013.