Setting up an establishment anywhere in the world brings many challenges. Different states will pose a different set of rules and regulations. Some may be unique to some countries. For the successful establishment of your global entity, you have to overcome many hurdles.
Challenges of Global Entity Establishment
The most critical factor in setting up an entity in any country is its culture. Every nation has a unique culture, and customers vary from culture to culture. Overcoming this culture change poses a considerable challenge to entities, as a way of life in a particular country may not be common in another country.
2. Organizational Communication
Communication is the key to success for any global entity. An effective communication system is an absolute must for any organization, and setting this up in itself is a significant challenge faced by entities. The behavior of the subsidiary team members and how they communicate significantly impact the success of business in foreign markets.
3. Tariff and Other Fees
All countries charge some fees or tariffs on goods when companies carry goods in those countries. Companies have to be aware of such costs/tariffs to expand their business, considering their budget and financial health. The companies also need to be mindful of the countries’ shipping, legal, and logistic laws where they intend to expand.
4. Human Resources
Human resource is the bedrock of every entity. When operating in various countries, knowing how to meet the workforce requirement is crucial. Many factors need to be considered, such as local hiring, or if it is an international office, global hiring would be preferred. Companies having small investments can send local talent to new overseas markets.
Going global needs a lot of documentation. This documentation differs from country to country. Companies need to know about the necessary and essential documentation in their countries of interest for expansion.
When setting up a new establishment, companies need to understand the buying process in that country. This helps them establish a loyal customer base to succeed in the long run.
7. Choosing the Right Markets
Entities must do enough research to determine the right markets for business expansion. Despite having the best products or services, companies may not have extensive sales if the market is not correct.
8. Physical Distance
These days due to the internet, a lot of business is done online. The world has become a global village, or rather a global team, but there is no alternative to physical presence despite all this. Hence, companies need to have distribution partners/subsidiaries to conduct business on the company's behalf. A lot of multinational entities have subsidiaries or agents in countries where they operate. These subsidiaries or agents scout for prospective clients for these companies.
Hidden Costs of Global Entity Establishment
Setting up a business entity in any country is an expensive proposition. There are several hidden costs in addition to the generally known expenses involved in setting up a business entity in any country. If one is not careful, it can erode your bottom line significantly.
The costs involved in a startup can pile up rapidly. Some of the expenses generally considered are relatively easy to price out, like license fees, real estate, website development, opening promotions, initial inventory, and so on. Getting off the startup after block after a grand opening and establishing the business for long-term growth is a considerable challenge. Entities need to be prepared for hidden costs, which can lead to complicated situations for the entities. So hidden costs are the most challenging aspect of this equation. Entities need to be aware of what they will be facing before they actually deal with it and respond efficiently and quickly.
The expenses that entities deal with vary on many factors. Entities should be aware of the hidden costs stated below that crop up unexpectedly.
1. Expensive Loans
Almost all entrepreneurs need loans from banks or private lenders to finance a startup. Banks will not lend 100% of the funds required to start. They will expect you to use some of your own money or have some collateral in the form of equipment, real estate, securities, and so forth. The cost of taking business will vary according to the lender and can wreak havoc on your budget estimates. One needs to be aware of fixing credit right at the beginning to save a lot of money in the years to come.
2. Employee Benefits and Perks
Besides what they will pay employees as salaries, entities have to account for benefits and perks and taxes if they do not want to find themselves in a fix. The overall cost can be as high as 1.25 to 1.4 times the basic pay, according to research by Joseph G. Hadzima Jr. of MIT Sloan School of Management. This increase is mainly due to workers' compensation, employment taxes, and other fringe benefits like healthcare, vacation, retirement, etc. As per Hadzima's research, a $50,000 salary could amount to as high as $70,000 for a single employee. The disparity becomes huge when accounting for multiple employees and could be devastating for the company.
The risk of shrinkage is always there for companies selling physical products. Whether unintentional or purposeful, this shrinkage costs retailers in the US alone an estimated $45 billion per year. Shrinkages can result from several causes and are not just limited to retailers. Shoplifting, paperwork errors, vendor fraud, employee theft are some examples of causes of shrinkage. Roughly 6 percent losses termed 'mysteries' cannot be accounted for under any of the above-stated categories.
Entities need to be aware of shrinkage being an issue and be proactive in preventing many factors responsible for shrinkage. Though it is not possible to avoid shrinkage altogether, entities should be able to mitigate it enough to impact the company's bottom line negatively.
At the time of starting, companies do not need a lot of insurance. However, over time, the need for insurance policies like liability insurance, general insurance for small businesses, errors and omissions insurance, property insurance, workers' compensation insurance, cyber insurance, and other insurance increases. How much the entities spend on various policies is based on many factors such as business size, type of business, location, industry, risk factors, revenue, and also the number of employees. Companies spend thousands of dollars every year on these policies, and for companies with tight budgets, it becomes challenging to stay on track.
5. Legal Fees
Companies generally do not go into business with the thought of generating a bunch of legal fees. This thought certainly does not mean that legal fees do not exist. For some companies, the legal fees could be their high hidden cost. This fee significantly drives up prices further.
Employees do not think much about taxes as the taxation part is automated and taken care of by the payroll department. But for a self-employed business owner, it is different. Irrespective of the revenue generated by the company, the company still owes the government something. These taxes need to be taken into account by the entities.
7. Fees and Permits
Depending on the company's industry, they need to be aware of the fees and permits required for the particular sector to be considered legal. Many companies do not realize this and spend vast amounts of money on something they didn’t know.
8. Administrative Costs
Finally, administrative costs crop up when you are not prepared. The administrative costs include things previously taken for granted, such as utilities, phones, internet, computers, printers, files and filing cabinets, stationery, software, office cleaning supplies, pantry supplies, and many others. Individually though, they might not cost much, but they add up to a significant amount of money over some time.
Entities need to be aware of the importance of money irrespective of being a startup, a recently launched company, or an entity in the growth stage of building a brand. Specifically, one needs to be aware of hidden costs in entity establishment in various countries. Employer of Record (EOR) like Skuad can make the entire process easier and smoother. EORs tackle the issues of hidden challenges and costs at their root and bring about efficient solutions.