In my last post I considered some of
the challenges and opportunities for US businesses expanding across
borders. This time round, I’m considering HOW to expand. Not
surprisingly there are many alternative routes to an overseas market, but below
are those which tend to be most popular.
Expansion from afar
One of the simplest ways to do
business overseas is simply to respond to customer enquiries. Obviously
this is one of the advantages of the internet which opens up your business to a
global audience without you even trying. The clear advantage to this
model is that you don’t need to proactively do anything and you don’t need to
go to the expense of building infrastructure at a distance.
However, as you would expect, there are pitfalls of simply responding to
enquiries and it’s left to the lawyer to highlight that irrespective of the
location of your HQ, in many countries where you are doing business, you will be bound by local laws.
This particularly applies to B2C businesses, where consumers are invariably
protected by their own laws and regulations, but there are also
scenarios for B2B when regulatory enforcement applies locally. Bear
in mind that if consumer products are involved, that opens up a much longer
list of issues which need to be considered: from packaging to IP to safety
regulations and advertising rules.
Quite apart from whether you are
identified as complying with local laws, there is also a risk that you are
considered to have a “permanent establishment” which in many
jurisdictions will mean that some form of registration may be necessary and
invariably filings and tax will become an obligation. For some countries,
the default position is that an overseas branch is established which often
means financial filings relating to the US parent company – which seems
excessive since US private companies tend not to have such obligations back
home. However, when you are benefiting from revenues overseas, you need
to play by the local rules.
The more traditional route to market
is to make a decision to establish overseas and that may be as a natural next
step to the scenario above. Establishing overseas often means setting up
a wholly owned subsidiary (often tax will need to be considered) and so often
if the overseas office is to focus on sales, a “cost-plus” model will
be established to enable the group to recognize revenues back in the US.
The structure of subsidiary will be subject to local regulations and different
issues crop up around the world: sometimes nominee shareholders need to be
involved, other times resident directors are a requirement.
Notwithstanding the structure of the
subsidiary, most countries will have an option to set-up a private company with
limited liability. Legally this should protect the parent company from
liability related to the performance of the subsidiary, but it also establishes
a presence within country to demonstrate stability and commitment to local
Natural needs for launch of a
business through the subsidiary are employees, office space, localized terms of
too much complication to enable your overseas employees to start selling.
A more expensive alternative
(but sometimes more efficient) to overseas growth is simply to buy an
established business. Whether you buy assets or shares, you will inherit
a workforce, established reputation and customer database. All of these
give you an immediate platform from which to operate, but of course integration
of the business can be more challenging where new products need to be
introduced, a company culture needs to be shared and a remote management team
needs to provide strategic direction.
Unfortunately failure to undertake
adequate due diligence, or simply ignorance of the above factors can lead to
failed acquisitions. However, with appropriate patience and people
skills, taking on an established business can be a short-cut to the challenge
of ramping up from a green field site in a foreign market.
Finally, there is the option not to
do any of it yourself and instead rely on others to fulfil you obligations to
local laws; to target new customers and manage existing customers for
you. Many businesses begin their overseas operations through resellers
and have much success. Often the success of the reseller leads to a
decision to cut out the middleman and so terminate the arrangement and launch
in the market by one of the above alternative methods. That termination
process can lead to disputes and a sudden realization that the terms on which
you thought you had engaged your reseller were either inadequate within the
local country or had terms implied by local laws of which you were
unaware. Implied termination payments for certain types of sales agents
in Europe often surprise (and frustrate) US principals who had engaged the
agent on their US standard contract.
So which route to take?
As with so many alternative routes,
they can all reach the same end point. You can of course apply any or all
of them in combination and often some lead onto another. The key to
success is to plan properly, recognize you are entering a foreign market so
take local advice on all aspects of business there and remain flexible as you
target new customers to enable you to react to localization needs of your
product/service and derive maximum value from your overseas operations.