Companies use mergers and acquisitions (M&As) as a strategic pathway for global expansion for many reasons – market saturation, supply chain diversification and competitive pressures being the most common.
It’s not uncommon for companies that have saturated domestic markets to begin looking abroad for new opportunities. Similarly, competitive pressures can drive businesses to expand overseas, especially if they notice that competitors are doing the same. M&As can also be a savvy response to global disruptions (as we saw during COVID-19-related supply chain breakdowns). Today, many companies have realized that diversifying supply chains through M&As can provide a safety net against localized disruptions. Whatever the reason for an M&A, it’s a safe bet that the opportunities the acquisition brings will be tempered by new challenges, many of which will center on managing the process of hiring, onboarding, and managing employees overseas.
The Role of EoR in M&A Hiring Overseas
Employer of Record (EoR) services provide a flexible employment solution, especially in unfamiliar markets. An EoR is a third-party vendor (a legal entity) that hires and manages employees on behalf of your company. While you are still responsible for managing the daily activities of employees, an EoR is legally responsible for the administrative side of the employment relationship, from payroll and taxes to benefits and compliance with all local employment laws.
EoRs are known for being a relatively quick and simple solution to hiring. That’s something that can be particularly useful in M&A scenarios where entity setup can take months, and companies need to ensure continued employment for acquired workers.
In addition to speed, there’s also cost to consider. In cases where a business is acquiring only a small number of employees—such as in a carve-outs—the cost and administrative burden of setting up a full legal entity may not be justified. EoR services allow companies to hire these employees without the costs associated with establishing a local entity.
Additionally, transition services agreements (TSAs) between the buyer and seller may be short or absent, making EoR a critical stopgap solution, where possible, to maintain workforce continuity.
Permanent Establishment (PE) Risks and EoR Limitations
While EoR can be a valuable tool, there are important considerations that may limit its usefulness.
- Permanent Establishment (PE) Risk: The criteria for triggering PE status vary by country (that’s why it’s very important that you partner with a global service provider with extensive in-country expertise). Nonetheless, if a company’s operations (including via an EoR) are deemed to have a taxable presence in a country, the business may face significant financial and legal obligations, limiting the feasibility of using an EoR.
- Employee Transfer Regulations: Many countries have strict labor laws governing employee transfers in M&A scenarios. Regulations such as the UK’s Transfer of Undertakings (TUPE, a Protection of Employment) or the EU’s Acquired Rights Directive (ARD) require employers to maintain certain employment conditions, making EoR transitions complex or even prohibited.
- Commercial Considerations: There may also be commercial considerations for the business that would make an EoR solution not realistic, even when there are only a few employees. That’s because EoR is strictly an employment solution, it does not necessarily solve other requirements of the business (for example, if a company needs to issue contracts locally).
- Employee Experience: Employees transitioning to an EoR may struggle with no longer being directly employed by the acquiring company and, instead, to a third party. This can create unease or nervousness in a situation that is already unsettling for employees.
- Benefits Limitations: Some benefits, such as company cars (a common benefit), may not transfer under an EOR arrangement, which can also affect employee satisfaction.
- Health and Safety Compliance: Employees in hazardous environments may require that employers meet additional safety measures that EoRs cannot provide or that would create undue liability and risks for both the EoR and the company.
Benefits of EoR During M&As
Despite these limitations, EoR services provide several benefits for companies engaged in M&As. It can be a very effective interim solution while your company is in the lengthy process of setting up an entity in a complex jurisdiction, subject to legal review. EoRs advantages include:
- Quick Market Entry: Companies can hire employees in new markets without setting up a legal entity, allowing them to test the waters before making a long-term commitment.
- Reduced Administrative Burden: EoR providers handle local compliance, payroll, and benefits, allowing companies to focus on integration and business strategy.
- Legal Compliance: In jurisdictions where legislation permits employee transfers to EoR, companies can ensure compliance while providing benefits to small groups of employees.
- Flexibility for Growth Strategy: EoR services allow businesses to explore new markets, assess feasibility, and later decide whether to establish a local entity based on business needs.
The Importance of Using a Single Expansion Provider in Multi-Jurisdictional M&As
Navigating the complexities of global expansion requires deep local expertise across multiple domains, including legal, payroll, tax, and regulatory compliance. A single expansion provider helps you manage the interdependencies between these functions, reducing the risk of mistakes, missed deadlines, lack of communication amongst partners engaged in complex tasks related to the M&A, and other types of misalignment.
Consider the following country-specific challenges that we’ve observed as we help clients successfully enact M&A transactions overseas:
- China: Companies acquiring businesses with employees in multiple provinces must set up a legal presence in each province. What starts as a single-entity setup in Shanghai can quickly balloon into additional branch registrations, increasing costs and administrative complexity. If a company moves from having one entity in Shanghai to three additional branches in three new provinces, the amount of legal requirements— ranging from bookkeeping and filing taxes, to setting up all of the HR benefits—can be overwhelming.
- Brazil: This country has over 5,500 municipalities, each with its own tax regulations and calculations. Only in-country experts can successfully navigate the resulting broad patchwork of laws and regulations to avoid compliance issues.
- United Arab Emirates (UAE): Business culture and documentation requirements vary significantly from Western markets. Many deals are conducted in person over coffee or tea, and without established local relationships, businesses may struggle to navigate bureaucratic hurdles.
The Holistic Approach: Your Key to a Successful International M&A
M&A-driven global expansion requires more than just a strong business strategy—it demands an understanding of legal, financial, and workforce considerations in each new market. EoR solutions offer a flexible approach to managing employment risks and obligations, but they are not a one-size-fits-all answer.
An in-country expert can tell you in advance about how the summer holiday slowdowns in Europe or Chinese New Year shutdowns can affect your timelines. They’ll have a birds’ eye view over the interdependencies between all of the services that you’ll be using. In fact, one of the most common challenges that we see is that many companies tend to take an overly siloed view over the complex services needed for an M&A, from finance and payroll to HR and legal.
The challenge, however, is that none of these areas work in isolation in normal circumstances—and even less so during an M&A transaction. Thus, it is absolutely critical for leadership, internal teams, and service providers to understand how one business decision affects the other. Having the partners in place who bring proven experience, local knowledge, and presence is the only way to tackle an international M&A successfully, particularly when multiple countries are involved.
By engaging with a single global expansion partner who can provide holistic support across multiple jurisdictions, companies can navigate complexities more effectively, reduce risks, and set the stage for long-term success in global markets.
HSP is an end-to-end global expansion solutions provider focused on helping companies scale their operations overseas effectively and efficiently. We are the only global expansion expert to offer growing companies a full suite of end-to-end solutions designed to help them scale to any size and country.
Our in-country experts have delivered the full spectrum of global expansion solutions—from EoR to entity set-up and management—across more than 100 countries (and counting). HSP brings full payroll, accounting, tax, legal, compliance, and HR services to corporate teams, integrating with in-house staff to both guide and execute across every domain.
Contact us to discover how our full suite of global mobility services can help your company successfully expand overseas in any environment.
