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6 QUESTIONS FOR FUNDING A JOINT VENTURE WITH A FOREIGN PARTNER
When Steve Levine struck a deal to bring his indoor air-purification technology to customers in China, he kept the financing simple. AtmosAir Solutions, based in Fairfield, Conn., worked out a licensing arrangement in which Shanghai-based Shanghai Hangsheng would sell the U.S. company’s technology in China. “We are supplying their company with our technology so we can put clean air into cars, buses and trains in China,” says Levine, CEO of AtmosAir Solutions.
AtmosAir Solutions’ partners were very eager. “They actually put up the money for the initial venture,” says Levine, whose profitable 10-year-old firm has revenue in the low seven figures. Every time AtmosAir Solutions sells Shanghai Hangsheng a set number of units, the Chinese company issues a letter of credit to cover the price.
Levine is excited about the freedom this gives him to grow his green business. “Our goal is to create a much cleaner, healthier environment,” he says.
With exports increasing by $2 billion in May to a record high of $195.5 billion, more U.S. companies are likely to find themselves working out deals like this as they spot opportunity abroad.
Licensing and distributorship are some of the most common ways that small and midsize firms finance deals involving overseas partners. “In midsize companies, their first foray is to find a distributor who wants to add to their product range,” says Martin Brown, executive vice president and head of Large Corporate, Commercial Banking, HSBC Bank USA, N.A. “That’s 90 percent of it.”
Getting trade credit is also common. But sometimes, if you embark on a really significant project overseas with a joint venture (JV) partner you may need to secure financing from a bank or other lender.
That can get thorny and raise plenty of questions to negotiate: What financing arrangements are best under the circumstances? Who will go after the money? And what happens if the deal falters? Will one of you get stuck holding the bag? “You’re stepping outside of the familiar,” says Martin.
DO YOU HAVE A CRACKERJACK ADVISORY TEAM?
You may be able to wing it with a do-it-yourself approach to law and finance in the U.S., but it won’t serve you well in an overseas market. “My suggestion would be to find a good lawyer, accountant and bank to understand the market,” says Brown. “There is an awful lot of help available.”
The type of financing you choose may actually dictate that you need legal counsel overseas. That’s true if you opt for secured financing instead of unsecured, according to attorney Henry M. Beck Jr., a partner with Halloran & Sage LLP in Hartford, Conn.
“Using secured financing and protecting security interests in assets around the globe require use of local counsel,” he says.
HOW BIG ARE YOUR PLANS?
If you are looking at a major deal like building a facility with a potential partner, you will need to get creative. Say you currently make shoes in China and your business is taking off. You want to open a new $20 million factory in India with a local company there. Both parties may need to put in some equity and raise some debt through the JV, based on factors like the value of your real estate.
“There are really two ways people finance it,” says Brown. “They raise the money here, either in debt or equity and downstream it through a subsidiary in the form of a loan or equity. Or, especially for substantial projects which are going to create significant asset value, they seek to finance it in the JV itself. Each partner will guarantee their share.”
In a JV, it is possible to raise debt and only take responsibility for the share you own in the project, he notes. “The types of debt most likely to be available are things like receivables financing,” he says.
But that is not always the least expensive option. “Many companies find the most flexible and least expensive financing is borrowing here in the U.S. and downstreaming either debt or equity into the JV,” Brown says.
WHICH PARTNER HAS THE BEST CONNECTIONS TO CAPITAL?
Debating who secures financing for a deal may be a moot argument if one partner is in a much stronger financial position than the other. “Largely, I would say it’s going to end up being financed by either the partner that is going to be controlling the venture or the partner that has the best access to funds,” says Halloran & Sage’s Beck.
WHAT DEALS ARE AVAILABLE AT HOME?
If you’re the lucky one with the job of securing financing, look for it close to home first or through your bank’s correspondent bank overseas. “Your best position is if you can finance it locally in the U.S. using your local banks and your local collateral,” says Beck. “You’re familiar with the bank and you’re using collateral that’s in your control.” You may also be able to tap into government-backed loans that encourage exporting if you stick with U.S.-based financing. The Export-Import Bank of the U.S., for instance, offers exporters government-backed, medium- and long-term loans.
Looking for financing in another country, by contrast, can bring added costs to the deal. “If you have to reach overseas for collateral or have to take financing out under another jurisdiction, you’re getting into heavier transactional costs,” says Beck.
HOW MUCH DO YOU TRUST YOUR PARTNER?
There’s no point going after financing if your potential partner is in shaky condition or has a poor reputation. Before you agree to talk with your bank, invest some time in rigorous due diligence. “The availability and reliability of public records differ from country to country,” says Ken Springer, president of Corporate Resolutions Inc., a NYC-based international investigations firm.
There are a number of former U.S. government investigators who can help you with this, reaching out to local sources to complement any review of publicly available information and confirm a potential partner’s reputation. “You need experienced assets on the ground,” Springer says.
Even if potential partners are honest, it doesn’t mean they know how to operate successfully in the country you hope to enter. “It’s important to have good partners that understand the overseas location,” says Brown. “You’re relying on something other than your own good business judgment. That can be riskier than expanding into a different state or a different product within your country.”
Also ask your attorney what financial protections you will have if your JV falls apart. Not every country has insolvency laws similar to those in the U.S. Some countries have modeled their laws after those in the U.S. “but not perfectly,” says Beck.
SHOULD YOU FORM A SUBSIDIARY?
Sometimes, it makes sense to bypass both a distributorship or JV and finance a deal entirely through your own company by setting up an overseas outpost. When Burton Snowboards in Burlington, Vt., launched an new overseas expansion into China recently with the help of Beck’s firm, it set up a wholly owned subsidiary, says general counsel Jaime Heins. “Historically we had operated on an agency-type model, analogous to a distributor,” said Heins. “In order for us to get momentum as a brand in that market, we needed to have a physical presence and really start to invest in that market.”
Of course, this isn’t something to take lightly. Burton’s finance team is working with Beck’s firm to identify foreign counsel. “Getting that total knowledge in the early stage formation process was critical,” says Heins. “You really need that local law firm knowledge to make sure you’re checking every box you need to early in the process—as opposed to being surprised down the road.”
Dogged Due Diligence
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