Beyond the Garden Path: How to Get Ready for International Expansion
As the continued uncertainty over Brexit offers little clarity on the future of the British economy, expansion into other jurisdictions poses a daunting prospect for UK businesses looking to scale up. Despite the current political and economic uncertainties, the UK is still a good stable place to domicile as a holding company, says Chris Cork, Director of haysmacintyre. A common misconception of international expansion may be of only large multinational businesses moving seamlessly between territories. In fact, 340,000 UK businesses trade internationally, 98% of which are SMEs.
International expansion features heavily in many businesses that are in their growth phase and is about more than just establishing an overseas branch or subsidiary, or deciding on which market to lay roots in. While tech firms lend themselves to cross border activity by enjoying a high degree of seamlessness and scalability, other knowledge-based businesses can also enjoy the benefits by outsourcing certain back-office functions or cultivating international sales networks.
By accessing new markets, trading overseas can substantially grow revenues, reduce the cost base by sourcing cheaper products or services, and provide access to new sources of finance and investment. The rewards can be significant, but it’s vital for business leaders to properly plan and execute their expansion. The process can be costly, with errors causing substantial losses and diverting attention away from the main priority of growing the business.
By accessing new markets, trading overseas can substantially grow revenues, reduce the cost base by sourcing cheaper products or services, and provide access to new sources of finance and investment.
The value of financial modelling
Businesses should be crystal clear on their vision for expansion and the key drivers for making that cross-border step. Being able to consider why they are looking to expand makes it easier for businesses to answer the more practical questions of how, when and where. For every successful expansion, there has been another that has failed because the benefits and risks had not been properly identified.
Three key elements are the strategy, business plan and financial model. Business leaders are typically excellent at articulating the first, good at designing the second but often neglect the third, despite all three being of equal importance.
So why is financial modelling so important? Most expansion plans require investment and put a strain on businesses’ cash before yielding an overall benefit, exacerbating an already acute problem in many scale-ups. A financial model helps to quantify the cash flow impact of starting foreign operations and includes modelling for certain scenarios. If a business is looking at selling into a new market, with support from a local marketing campaign and sales team, financial models can show the maximum strain on cash flow, allow for contingency planning where growth may be below expectations, and even identify where any external funding is required.
Three key elements are the strategy, business plan and financial model.
When building a financial model, it’s important to consider the balance sheet. Despite its focus on generating additional revenues or lowering costs, the balance sheet will also reveal factors not immediately apparent in an income statement, such as capital expenditure for new offices and equipment, poor credit terms due to limited local trading history, and local tax factors, such as VAT and income tax payments.
Putting the right systems in place
With new operations comes the requirement to put in place new structures and systems. There is no one-size-fits-all approach to system building. A remote sales office will be subject to different motivations and pressures from an outsourced development team, for example. Despite this, there is one overarching concern: control. Even with the developments in communication seen in recent years, a foreign operation will by default be more independent than domestic subsidiaries and branches due to distance, language barriers, business culture differences, different developmental staging and local management naturally enjoying greater autonomy.
To mitigate against these risks, expanding businesses should invest time and effort in building robust monitoring systems. Overseas operations should be required to report on a regular basis, maintain records on a common, accessible system (advances in cloud technology have substantially improved opportunities in this area) and make themselves available to a routine inspection or even an audit.
Founders and leaders should remain closely involved, not only at a strategic level but also on the relationship side. Communication with local teams is vital and whilst it should be clear that they are responsible to central management, their feedback should be listened to and where possible, acted upon. This has the dual benefit of reducing reliance on ‘management by numbers’.
When looking to expand overseas, it is crucial to fully understand the local laws and regulations to avoid being caught out.
Ultimately, the more freely data and information can flow, the lower the risk is of head office losing control.
Regulatory and compliance restrictions
When looking to expand overseas, it is crucial to fully understand the local laws and regulations to avoid being caught out. These can vary greatly from country to country and fall into three broad categories: employment law, taxation and reporting requirements. There may also be specific rules where businesses are operating in certain industries, such as manufacturing or financial services.
One key recommendation is for businesses to consult with local legal and financial experts before embarking on expansion. Good advice early on will always pay for itself, such as when considering employment and sales taxes in particular. By their nature, such taxes give rise to a liability on recurring transactions, meaning that if something is structured incorrectly, an error is made on every sale or every time the payroll is run. Left unchecked, the financial implications of these errors can be severe. This is especially true of the United States, where each state has its own employment and sales tax regimes, in addition to those imposed at a federal level, meaning there are two levels of legislative compliance to contend with.
Most law and accountancy firms are members of international networks and will be able to make introductions with accredited local experts at no cost. MSI Global Alliance, for example, consists of over 250 firms in 100 countries, allowing businesses to access coordinated advice both at home and in the country of expansion. This guarantees clients receive a global perspective, taking into account any effect on the UK position.