Is there a "right" approach to international expansion?
Published on 6th Sep 2017
You’ve decided to expand internationally; what next? The first step is doing adequate research to determine which country / market is right for your product. In addition, there is a wide range of commercial, legal, tax and other issues to consider – so do not underestimate the importance of planning ahead. Timescales for set up vary from country to country and you’ll want the legal, tax and other regulatory necessities to be set up in good time to align with commercial opportunities. The downsides of failure to properly consider can be missed opportunities or, often, heavy financial sanctions if there is not compliance from the outset.
Determining the base of operation
Choosing your base of operation is the first step – a number of factors influence this decision such as product and market fit, size and accessibility of the market, ease of doing business, talent availability, language, tax rates, the employment environment and infrastructure. Market opportunity, operational and regulatory aspects should all be considered.
Create the right structure
Wherever you start accessing the market in a new country, it is important to ascertain whether your activities constitute a tax presence in that jurisdiction. It is a fairly low bar before this is triggered. If your activities do constitute a tax presence, you’ll need to set-up a corporate legal structure. If this is your first international entity, a wholly-owned subsidiary of the US parent company is a straightforward option and avoids possibly being required to disclose the company’s US financials. If you have an existing overseas entity, creating a new company as a branch of the overseas company is another approach to consider.
For the first international entity, many businesses will seek to extend sales in the new market and have the newly created overseas company provide services to the US parent company. To avoid additional tax liability, an inter-company agreement should be entered into that details this “cost plus” arrangement with the overseas company charging the costs of its services to the parent company and adding in an appropriate mark up. To maintain tax efficiency and the “cost plus” arrangement, contracts with foreign customers should continue to be signed by the US parent company.
Build the right team around you
Picking the right legal team is crucial to properly structuring the overseas business. Alongside your lawyers, you will also need a payroll provider and accountant to manage the necessary tax filings. Most companies will also need a new bank; and some countries will require a bank account before a new entity can be set up with the requisite share capital on deposit. This will also enable the company to pay local employees and operate the business. Banking regulations are complex and the account opening process can take many months – so get started on this as soon as practicably possible.
Build the right team within
To enter a new market, you need the right team to sell to and service customers.
- Conduct the same, if not more, due diligence on potential hires that you would in your home market. If you plan to send a US employee overseas to set-up the operation or join the team, make sure you get the right visa and start this process early; it can take many months from start to finish.
- “Employment at will” does not apply outside the US and employment regulations of the country in which the employee is resident will govern. A local employment contract should be entered into because it is usually a legal requirement and also, where appropriate, to protect the company from the often more onerous rights overseas employees enjoy.
- If you plan to incentivize your new team with stock options, find out whether your company is eligible to offer tax efficient options, such as EMI options in the U.K. Such programs offer significant savings) for both the employer and the employee and can be key to recruiting and incentivizing talent. If the company is not eligible for tax efficient options, you can localize your stock-plan to comply with the tax structure in that county or consider alternative forms of incentives.
- Once you have begun operating and realize one of your new hires isn’t working out as expected, take advice to limit potential liabilities on dismissal and ensure that you do not act in breach of contract (which could result in the company losing important business protections such as non-compete provisions).
- Find out whether there are works councils in the new country of operation and what obligations this may place on the company.
- Consider how to maintain the same corporate culture and make your overseas employees feel like an integrated part of the wider organization.
- Understand that your initial hire and/or overseas leadership will be required to spend a considerable amount of time on management and operational functions, especially at the beginning stages of overseas growth.
Take the right advice and localize
Once up and running, localizing the company’s contracts and data protection policies and practices may become necessary.
Customers may begin requesting that agreements be completed under the laws of their home country or another jurisdiction outside the US. Your legal advisors can localize your US agreement with the right legal terms, language and currencies for a particular country or for a regional version that will be more palatable to your customers.
European data protection and the wider privacy regulations are invariably important, and an area which is very different to the way that US companies usually operate. Failure to comply can result in significant financial liabilities. If you collect any consumer or individual data and/or transfer such data back to the US headquarters, consider what registrations are necessary and take advice to put in place the proper data handling procedures – as well as localizing your privacy policies.
Maintain the right pace
Take a bold but cautious approach to the new market by scaling the team as the opportunity and demand increases, without getting ahead of the market. You don’t necessarily need a shiny new office from the start, maintain flexibility and consider selecting the right serviced office space (or remote working) that meets your space and location needs as well as the corporate culture.
As the team grows, you can find your own office enabling future headcount expansion pay close attention to the lease agreement as it will likely be significantly different to what you see in the US.
Stay patient, as business cultures vary market-to-market, for products with a long sales cycles, it may take over a year to see successful sales and revenue growth in many countries. Stay flexible, with your approach to the new market – and revisit your strategy as you learn what works and what doesn’t seem to produce the traction you expected. As with all key business decisions, prepare and plan in advance for market entry, for scaling the company abroad and for the challenges your company may face on its global growth.