How an operational evaluation framework helps when expanding captive financing operations into new regions

This raises many challenges, many of which can be addressed through the development and implementation of a robust framework to support the evaluation process of the ‘go to market’ options and operational considerations of any such planned expansion.

Invigors’ experience has shown that there is a critical phase of a business feasibility and operational evaluation that often gets missed in the enthusiasm to move forward once the initial business case justification has been made.

Many captive financing entities move directly from the business justification phase straight into a detailed legal/regulatory due diligence phase without having conducted their own operational feasibility assessment.

The consequences of this are often a due diligence analysis that is incomplete and sub-optimal, leading to wasteful and expensive rework. In extreme cases, this may lead to regional captive expansion investment decisions that are misdirected and based on incomplete and inaccurate data.

A better approach that Invigors has adopted with clients is to provide a framework for a comprehensive analysis of a captive’s capabilities, addressing each country covered in the expansion programme. This focuses on three high-level categories:

• Go to Market considerations
• Operational considerations
• Regulatory and Legal considerations

Let’s consider each of these in turn.

Go to Market considerations

A good place to start is to provide an overview of the geopolitical positioning of the country or countries under consideration. Key elements to include in this are their form of government, the degree of political and economic stability, the nature of the banking and legal infrastructure and how these influence any potential investment.

Clearly, it’s important to outline all the potential ‘go to market’ options in terms of operating model. These can include a local captive presence, cross border leasing or lending into the country from an external central hub, establishing a vendor relationship with third party local bank or other leasing entity, together with a combination or hybrid of any of these options.

Having determined all the potential ‘go to market’ options that that are available in each country, it’s then necessary to rule out those which are not possible, for example due to legal restrictions, or those which are impractical, for example because of excessive regulatory and compliance obligations.

This leaves us with the remaining ‘go to market’ options which are feasible, for which it is now necessary to determine the pros and cons of each and to rank them in order of preference. For the preferred options it’s useful to provide an outline of their main operational features together with the associated regulatory and legal considerations.

Operational considerations

The evaluation framework should consider a number of operational factors, starting with a review of the main features of the typical finance product offerings by each country. This will also need to include a description of primary customer and legal documentation supporting the various finance product offerings, together with an overview of how they operate.

Another important requirement is the need to evaluate the potential engagement models that could support local country sales and marketing operations. This will also cover any local legislation governing these operations and an understanding of the generally accepted business practices in terms of how these engagement models are implemented and operate.

Taxation is a vital operational consideration and a review of the high-level tax rules for each country which impact captive or cross border operations is a key requirement. Also included should be a description of the main withholding tax rules, VAT rules where applicable and permanent establishment considerations.

Last on the list of operational considerations is a review of in-country treasury and currency control guidelines, in particular local central bank regulations which could affect captive operations.

Regulatory and legal considerations

Regulatory and legal considerations include a review of the potential corporate and legal structures for the business which could support the various captive or cross border operations required under the proposed engagement model (for example limited liability entities, branch offices etc.).

The operational review should then move on to address the relevant captive or cross border legislation by country including a description of local regulatory and compliance regulations. At this point it is useful to include sources of local legal advisory services and country contacts that can provide practical legal due diligence feedback. Invigors has many in-country specialists able to offer that support.

Prior to establishing a business entity, it is essential to drill-down and prepare a comprehensive list of questions to be considered for the legal due diligence questionnaires. These will be reviewed and completed by local legal advisors across each country and will need to include topics such as finance product features, engagement model considerations, employee rules, operating entity types, registration and licencing requirements, reporting and regulatory requirements, together with Know Your Customer (KYC) and Anti Money Laundering (AML) requirements.

Talking of the latter, it’s also important to undertake a review of KYC and AML regulations and processes for each country under consideration. This should include some practical guidance on compliance procedures and any potential issues or pitfalls.

Finally, we should not overlook the local regulations governing data protection and use of technology. This review should cover the local country regulatory requirements for the financing and purchase of encrypted technologies across each country, as well as requirements in relation to the processing and storing of sensitive data. Details of data privacy requirements should be included.

In conclusion, Invigors strongly advocates adopting this systematic approach that will mitigate risks from a captive’s expansion plans. This framework provides a solid foundation on which informed decisions on executing a captive expansion strategy can be made. We support our captive finance clients in delivering the detailed evaluation analysis required, based on our extensive experience and knowledge of both mature and emerging market country asset financing engagement models.

* Kieran O’Brien is a partner with Invigors Ireland