Taking the Business Overseas
It has been a while since I posted the last entry on this page. This entry will focus on international expansion for small to medium sized companies.
Expanding overseas is a promising and attractive option for many businesses and in some cases may be a near-requirement. Although the global economy has helped bring manufacturers, service providers and customers closer together from remote, distant corners of the earth, there is still often a need for a physical presence overseas. It can be exciting too, as a new territory can bring new opportunity. This promise certainly requires some thought and planning, however. Here are some things to consider:
1. Choosing the vehicle for entering the new market (e.g., branch, subsidiary, joint ventures)
How do you want to enter the foreign market? It’s quite easy to say “we want to set up an office in Brazil.” Do you want to set up a branch, a subsidiary, a joint venture with a local partner? It may be surprising to some, but they are not all one and the same. It is important that you understand the nuances of each type of footprint. An agency is not a distributorship is not a branch. On top of the varying legal ramifications locally, the choice of vehicle can also significantly affect your US tax obligations.
2. Structuring the entry vehicle.
This goes hand-in-hand with the above subheading, but involves a few more steps. If you are partnering with somebody, or if you are trying to optimize your tax status, you should pay particular attention to structure. What is your company’s exit strategy? What does the company envision in the short and long-terms? Your strategy on the legal front should reflect and enable the implementation of this vision to the extent possible.
3. Choosing and negotiating with foreign partners and agents.
It’s amazing how so many people and companies who engage in extensive due diligence domestically will almost believe whatever foreign snake-oil salesmen tell them. ”Oh, they’re supposed to be really connected” is often quipped, but how do we know this? A lawyer can do extensive due diligence work on potential partners. You have to determine if the foreign partner or agent has the expertise you need, or the connections, or even the financial viability and trustworthiness. Notably, international corporate investigations companies can also help you in this regard.
4. Establishing and managing the relationship with the right U.S. and locally-based service providers and vendors.
A lot of work that may need to be done overseas can be done over the internet or in the United States. However, you need to determine how to structure your approach. As this can be a months’ long process, it is important that you take a tactical approach towards managing the project. It’s good to always have one point person within your entity who can communicate with counsel, accountants, and consultants on these projects. As for local vendors, good advice locally is priceless. Make sure you are working with the right people, as obvious as that may sound. While spending more money may not guarantee better service, this is not a time to be excessively frugal for no reason as frugality can wind up costing you quite a bit.
5. When and how to use local counsel.
This is related to the immediately prior point. Using quality local counsel is exceptionally important, and it can be generally useful to have local counsel engaged in a dialog with your US counsel. Setting expectation levels early is certainly beneficial.
7. Managing cost.
As stated above, overseas adventures can become absurdly expensive. Account for more than whatever you budget, but also keep an eye on all your vendors and service providers and try to keep costs under control. Monitor all expenditures or before you know it, things will go out of control. Knowing what you want from the beginning and setting milestones will help, but you should also account for surprise administrative fees and wait times.
8. General themes to consider when working in certain countries and region.
Every country and region has its idiosyncrasies. It doesn’t stop at business, and it is best to self-educate and seek consultation on these issues. Again, it may appear obvious, but I’m amazed at how many people really do not understand this basic principle. Working in China may offer some experience that may be useful in setting up a venture in Abu Dhabi or Chile, but the fact is that every region is different. While countries have varying laws, experiences in some countries can be transferable to other jurisdictions in the same region. For example, laws on foreign ownership of property, foreign sponsors, tax matters. The more educated you are about these issues, the more informed you can be and the more active a role you can play in the process.
9. Adherence to US and other laws with foreign application
Your first urge may be that working overseas frees you from legal obligations in the United States. Think again. U.S. laws are becoming arguably more and more extra-territorial in application. Whether it’s sanctions laws such as Office of Foreign Assets Control (OFAC) regulations, to U.S. export control regulations promulgated by the Bureau of Industry and Security (BIS) to the Foreign Corrupt Practices Act (FCPA) regulations against bribery to U.S. securities laws, you should always make sure you are in compliance with all applicable requirements. Although compliance programs are not a luxury for companies with a physical presence overseas, the need for a comprehensive compliance program becomes increasingly pressing for companies doing business overseas.
The list looks simple, but as can be seen, the challenges are formidable. A foreign expansion can be a cash sinkhole from a legal services end alone, much less for other items. Make sure your approach to this venture is professional, compliant, and cost-effective.
