Expanding Your Business Outside the United States
June 5, 2019
In today’s interconnected world, we barely think twice about buying products from East Asia or engaging services in India or Europe, or flying to another country for a meeting or vacation. Indeed, your business already may be doing transactions with international customers or suppliers. The ease of reaching foreign customers prompts many entrepreneurs and established businesses to consider having operations or entering into a joint venture (JV) abroad in order to manufacture products there, market to consumers in developing (or developed) foreign markets and to save on labor costs. Usually, a specific opportunity in a specific country prompts a company to consider overseas expansion, in which case the company may consider only that single market. In other cases, the new money streaming into consumers’ pockets in developing economies such as China, Senegal, Colombia or Montenegro invites a company to think about potential profits to be made in such an economy, and the company may be willing to consider from a list of several countries.
Whatever the reasons for considering expansion or JVs abroad, there are many factors to explore thoroughly in order to enter a foreign market knowledgeably and with realistic expectations of the financial, managerial, legal and cultural challenges you will face. Your risk mitigation must begin at the same moment as your exploration of the overseas potential.
Having worked on deals in more than 45 countries, I’ve seen many success stories, but also several failures, mostly stemming from lack of sufficient knowledge of laws and regulations in the foreign nation and/or an unwillingness to adapt to cultural differences that render a U.S. company’s business model unsuited to a particular market. I have also worked with several companies who did their homework on a foreign market only to decide that they weren’t yet ready to take the leap. I have developed a list of questions and issues for companies to research in order to make wise decisions about foreign expansion. These tips apply whether you are opening a small office simply to research a new market, entering into a joint venture with a foreign partner in its own country or moving the company’s entire operations abroad. In this and the next several Shulman Rogers BFS e-Newsletters, I’ll share my list so your company can knowledgeably approach this important decision.
As a business owner or key employee, you already know how to do preliminary market research, feasibility studies, competition analysis, cost projections and due diligence on potential local partners. But once you have confirmed your interest and suitable demand in the foreign country, what’s next? Let’s examine ABC Company, a Delaware corporation with five American shareholders who own 51%, 17%, 12%, 10% and 8%, respectively. ABC manufactures and sells sports equipment to retailers and recently began contracting with an Indonesian factory owner to make baseball mitts, footballs and other leather sporting goods for ABC at a price that is cheaper than what it was paying to a factory in Mexico. After a year of successful partnership, ABC is considering creating a company in Indonesia that will make wooden and rubber sporting goods, such as baseball bats, table tennis paddles and balls for racquet sports. Wood and rubber are plentiful in Indonesia, so the raw materials would be locally sourced and local labor would be hired in the factory. ABC would like to continue doing business with its Indonesian supplier but is not sure if it wants to offer him part ownership of the new company. ABC has done significant market research, competition analysis, cost forecasts, and marketing, sales, and finance due diligence and found the conditions to be favorable expanding their presence in Indonesia due to the low labor costs, raw material availability and low costs, access to Asian markets, and an excellent existing local partner.
In next month’s issue, we will examine the initial questions ABC Company should take to their international corporate lawyer and tax specialist, and in future issues walk through the entire process ABC will face in creating its first business venture outside the U.S.
The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or contact us here.