By Saul Howerton, Global Chief of Staff, Advisory Services
In January 2011, the Target Corporation announced that it agreed to pay C$1.825 billion to buy leasehold interests in over 200 sites in Canada so the company could open stores in that country by early 2013. Target CEO Gregg Steinhafel was optimistic about the move, which was Target’s first foray into international expansion. “We are very excited to bring our broad assortment of unique, high-quality merchandise at exceptional values and our convenient shopping environment to Canadian guests coast-to-coast,” Steinhafel said. “We believe our investment in these leases will strengthen the surrounding communities as well as create strategic and financial value for Target stakeholders.”
In the end, Steinhafel’s optimism was not justified. This past January, less than two years after Target opened its first international stores, the company announced its plans to discontinue Canadian
Probably needless to say, the failure was not only unexpected, it was costly. In Target’s January press release on the matter, the company reported that it expected to absorb US$5.4 billion of pre-
The story grabbed headlines due mostly to Target’s size, the losses it incurred, and its widespread, generally excellent U.S. reputation. Still, the distinguished company’s sad end in Canada should serve as a reminder to all companies — large and small, startups and venerable institutions — that international business ventures don’t always go as planned.
Given that hard truth, a business considering global expansion should understand the costs and time associated with winding down host-country operations in the event that corporate strategy changes. Understanding exactly what is entailed in discontinuing operations is a critical part of any business’s international expansion due-diligence process. Indeed, from a
The first thing to know about winding down international operations is that all countries have their own unique requirements, costs and timelines. And it is more costly and onerous to shut down a business entity in some countries than others. For example, dissolving a subsidiary in the U.K. generally takes five to six months, whereas liquidating a Wholly Foreign-Owned Enterprise (WFOE) in China generally takes eight to twelve months.
With the caveat that all countries have unique requirements, some important generalities can be made and should be familiar to any business considering establishing legal entities outside its home country. Here is a list of some typical requirements a business must complete when discontinuing operations in another country:
- The company must cease trading.
- The company must not have any outstanding tax liabilities (and may be required to produce a tax-clearance letter) or have any debt due to any other host-country government agency.
- The company must have an external audit performed on its financial statements.
- The company must not have any outstanding charges in its register.
- The company must not be involved in any court proceedings inside or outside the host country.
- The company must not have any current or contingent assets and liabilities on its balance sheet (i.e., the balance sheet must be “zeroed out”).
- The company must obtain the consent of its directors.
Again, the above list is not exhaustive, and every country’s requirements are unique, but it gives some indication of what’s involved when you must discontinue operations in another country. Generally speaking, the only items a company should have left on its balance sheet just prior to shutting down operations are a small amount of cash (to pay any outstanding fees associated with the closure), along with the requisite shareholder’s equity.
You should also keep in mind that varying entity-closure requirements exist within a single country, depending on the type of legal entity involved (for example, a branch or a subsidiary), the means by which a company discontinues operations (for example, through a traditional liquidation or through a solvent closure), and other factors. Timelines for winding down operations typically range from three to twelve months, depending on the country.
Companies must also understand that country-specific
While understanding the costs and obligations of discontinuing operations in an objective country is one of the more unpleasant aspects of a thorough due-diligence process, it’s an important aspect, and one that shouldn’t put any company off its pursuit of international expansion. It’s simply part of knowing all the potential costs and benefits of entering a new market so that your organization can make an informed decision and put itself in the best position to thrive in an increasingly global economy.