While hunting for a supplier to make cute sweaters and shoes for dogs, a U.S. pet food firm asked consultant Michael Zakkour to check out a China-based manufacturer. It had advertised on the online marketplace Alibaba.com.

Zakkour dutifully visited the apparel maker’s headquarters in Shenzhen, near Hong Kong.

“They ushered us into this gigantic meeting room,” he says. “It looked like something from the old Mao-Nixon sessions.” An executive from the firm greeted Zakkour with a business card. “We do have a division that does pet supplies, but we have a hard time doing business with U.S. companies,” the executive said. “Another part of our company makes electronic components that are banned on the terrorism list and are considered possible weapons of mass destruction.”

So much for cute puppy apparel.

“Thank you for your time,” Zakkour told him.

That experience several years ago at a previous firm wasn’t the first time Zakkour discovered dramatic surprises when checking out a potential overseas partner. As a result, he tells clients who are looking to engage with an overseas business partner to practice what he calls the 6Ds: “Due diligence. Due diligence. Due diligence.”

“It’s shocking to me how often small and midsize businesses don’t engage in some of the basics,” says Zakkour, principal and head of the China/APAC Group at Tompkins Intl. in New York City and author of China’s Super Consumers, a book about how Chinese consumers are changing China and the world.

Of course, it’s hard to know where to start if your firm is working with an overseas partner for the first time. The potential risk factors to check out—from economic conditions in a potential partner’s country to differences in accounting practices—can seem overwhelming.

The answer, say experts, is to break out of the do-it-yourself mindset many entrepreneurs have and get help from pros such as a seasoned banker, accountant, attorney and, if needed, an investigative firm. “Make sure you surround yourself with people who have had experience in the cross-border segment,” advises Mark Luppi, head of Business Banking at HSBC.

Your accounting firm or law firm may also recommend enlisting the help of counterparts in the country where your partner is located, experts who know the nuances of local laws and practices.

While assembling such a team is a financial investment, doing so can help you avert expensive disasters. “It’s the cost of doing business,” says David Levy, an attorney in the Litigation, Risk Management and Arbitration Practice at Kleinberg Kaplan in New York City.
Here’s how to line up your A-team and cover your bases.

TAKE THE PULSE
Make sure you understand the regulatory and political climate of any country you’re entering before you start hunting for partners. There may be issues brewing that you need to take into account.

“You don’t want to be in a situation that is not going to meet U.S. regulations or is not sustainable,” says Luppi.
One place to get started is HSBC’s Global Connections website (https://globalconnections.hsbc.com/us/en), which offers free trade forecast reports for many countries. Luppi says other good resources are the database LexisNexis and Thompson Reuters’

Accelus World-Check, which provides intelligence profiles of countries and individuals around the world. These require paid subscriptions.

Make sure you research labor market regulations and cultural practices that may affect the cost of doing business, advises Suzanne Garber, a former managing director for FedEx in Brazil who is now based in Philadelphia and serves on the board of directors of several small and mid-sized organizations that are globalizing. For instance, notes Garber, in some countries, employers have to consider the implications of laws offering significant paid leave for parents.

Cultural practices that affect the workplace of a potential partner may also add to the ongoing cost of an overseas alliance. “There are some countries where the employees are afforded a hot meal for lunch,” notes Garber. “The country would have to pick up the tab.”

FIND PARTNERS WHO ARE PRE-SCREENED
If you don’t have many contacts in a country you plan to enter, Garber recommends getting in touch with the chamber of commerce for the locale where you want to operate. The chambers often have screened local businesses that want to do business with U.S. companies. Also ask the U.S. Embassy if it sponsors trade junkets where you can visit local firms that may be a good fit. Trade organizations in your industry that have international members can also be a good source of contacts, Garber says.

“The closer you can get to a personal recommendation, the better,” she says.

Business brokers can also be a valuable resource, says Levy. “There is a certain amount of vetting business brokers do in advance,” he says. “In some instances, the business broker can be a useful conduit for fact-finding and confirmation.”

Also research the credit history and financial performance of potential partners, advises Matthew Debbage, president and COO of U.S. operations for Creditsafe, a provider of credit reports for companies around the world that has its U.S. office in Allentown, Pa.

Pay attention to such factors as whether they are paying bills late or are involved in court disputes, he advises. And check out the track record of key officers of the company and the performance of their past companies. Did they thrive—or go bankrupt? “When you start piecing this together, the data tells lots and lots of stories,” Debbage says.

DON’T ASSUME YOU’RE COMPARING APPLES TO APPLES.
Having your accounting firm work with a local audit team to analyze a distant company’s financials can help you avoid misunderstandings stemming from differences in accounting practices, advises Johanna Nielsen, an audit partner on the Capital Markets and Private Equity Team at Citrin Cooperman in New York City. Often, such differences may be industry specific. Many American companies aren’t aware of the labor-related costs companies in other countries face. “I had one situation where a U.S. company purchased a French entity and didn’t understand how costly it would be to terminate some of its employees,” says Nielsen. “It ended up costing the U.S. company three times what it estimated to acquire this entity.”

PROCEED CAREFULLY
Right at Home, an Omaha, Neb.-based provider of in-home senior care and assistance, operates in eight countries outside of the U.S. and has more than 450 locations on five continents. When it expands across borders, it does so through master franchisees.

These are well-capitalized businesspeople in each country who buy the rights to sell all of the franchises there.

For Right at Home, finding a master franchisee who can bring knowledge of the local culture, customers and business world is important, says Brian Petranick, the company’s president and CEO.

The chain looks for industry-specific experience, too, but doesn’t consider it mandatory. “It generally is a little easier if we find someone who has been in a service-based business before, specifically in healthcare,” says Petranick.

To make sure potential master franchisees are a good fit, the firm asks them to submit a business plan. If they pass through the initial vetting successfully, they are asked to run a pilot office of the chain for a year before they start franchising. That way, they learn the business model prior to awarding franchises, he says.

BUILD IN AN ESCAPE HATCH
Excited as you may be about a partnership, it’s important to take into account the possibility that you may someday want to unwind it or disagree with your partner. When the partner is located in another country, it is especially important to address these scenarios, because dealing with international “counterparties” could bring added complications, warns Levy.

Creating a contractual “exit scenario” can sometimes prevent or avoid the need for litigation if you do decide to separate, he says. “If you don’t provide for how things might come apart you’re missing a potential opportunity to protect your own business going forward,” says Levy.

Pay close attention to paperwork designating where you’ll work out any disputes—and negotiate for a convenient and most favorable venue—because these factors may affect the outcome, Levy continues. If you’re in New York, for instance, negotiate the deal so any disputes will be governed by New York law and you will be able to handle legal matters exclusively in New York courts, he says. “You don’t want to, for example, find yourself in a dispute with your Nigerian business partner over distribution of profits and dragged to a Nigerian court.”

Of course, the hope is that it will never come to that. When you’ve done the right due diligence up front, creating successful partnerships is a lot easier.