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When an overseas subsidiary underperforms, it’s not always easy to pinpoint the cause. Harder still is deciding on the course of action needed to protect the health and value of your broader business.

It’s vital to select the most suitable option for your business and pursue it in the right way. A misjudged step risks contagion: problems that seem confined to a troubled subsidiary may infect and drag down other parts of your business.  

KPMG Enterprise’s Going global report offers sound advice for privately-owned businesses assessing their next move. In essence, these boil down to three options:

  • Developing a turnaround plan to get your subsidiary back on track
  • Selling the business
  • Closure
     

Make sure you’re getting accurate insights

"The starting point is clarity on what your group is trying to achieve," says Andrew Burn, Partner at KPMG in the UK. "Are your subsidiaries activities and presence in a foreign country of strategic significance? Do other parts of the group depend on it? Is it key to future expansion?"

Once you have a firm handle on its importance in relation to group objectives, you must arm yourself with the facts – ensuring you don’t make decisions based on flawed or misleading information.

"Make sure you have reliable information" advises Andrew. "I have come across businesses within a group that appear to be underperforming due to the allocation of group costs and internal recharges. After costings were worked out properly, a different picture emerged."

Similarly, it’s easy to reach the wrong conclusion based on incomplete sales pipeline figures. Have employees got round to filling in all the data? Are projections underpinned by accurate assumptions? Make sure you have the complete picture.

How to fix it

"There are many reasons for underperformance," Andrew states. These can range from cashflow and balance sheet issues to operational problems and bad management. "If you decide to retain and fix the business, you need to come up with a programme of measures addressing timelines, responsibilities and costs," he adds.

Things to consider include:

  • Create a financial baseline against which progress can be judged: not every business is equipped to tackle turnarounds of this kind in-house, so you may need to bring in independent advisors with specialist local knowledge or expertise in improving performance. 
  • Sort out operational inefficiencies: "Several years ago I helped a large car parts manufacturer operating across Europe," Andrew says. "Too many links in the business’s manufacturing chain needlessly inflated costs: components went through four or five different plants. Simplifying production helped the business recover.“
  • Determine if the right management team is in place: "This is critical. Does management need strengthening due to lack of capacity? Or is it more a matter of ability?" Andrew points out. "If the management team presided over a subsidiary’s difficulties, consider if they are the best people to lead it out of trouble. You may need to provide training and support, and even replace some or all of the team."

How to sell

Changes in group strategy, or perhaps an unsolicited approach from a buyer, may create an opportunity to sell. However, "in times such as these, it’s essential to keep management motivated and focused on results," advises Andrew.

One approach is to offer ‘exit bonuses’ to important members of the management team, which are payable on meeting performance targets in the run-up to completion of the deal. In the case of one European business, the commercial and operations directors were incentivised with exit bonuses equating to over 30% of annual salary. As a result, performance was maintained right up to the sale.

There are many loose ends to tie up with the sale of an international subsidiary – and you should always be aware of the impact on the rest of the group as a whole. If you have common suppliers across different countries, for example, will the sale affect group terms and conditions or volume rebates?
 

How to close it down

While making these changes can be effective, closure may still be the best option in some cases. However, there are three key elements to bear in mind:

  • You must be on top of local regulations on employee rights and insolvency procedures. "It’s advisable to ask a lawyer or an accountant to undertake a review to highlight where your liabilities sit," suggests Andrew. This includes contracts. "I have seen businesses where employees have contracts with a subsidiary, despite working for the group in another country," he adds.
  • Rule out the risk of contagion, where problems can spread across other parts of the business, and ensure the wider group isn’t liable for the subsidiary’s debts.
  • Look at the bigger picture. While a subsidiary may be underperforming at one point in time, it may make more sense to close down part of your group in a different country and transfer those operations into the problem subsidiary – if there are compelling strategic reasons for doing so.
     

Key takeaways

  • Be clear on what you are trying to achieve, and ensure you have accurate data on which to base your decisions
  • Plan, implement and closely govern the turnaround strategy 
  • Make sure you have the right blend of existing and new resources/skills assigned to addressing the problem
  • Regularly monitor the results being achieved by the turnaround and adjust your approach accordingly

For more on the ins and outs of fixing an overseas entity, download the KPMG Enterprise report below 'Going global' or drop us an email to talk about any specifics.
 

"The starting point is clarity on what your group is trying to achieve" Andrew Burn, Partner, KPMG

"It’s essential to keep management motivated and focused on results" Andrew Burn, Partner, KPMG

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