Whether you are establishing an office or a beachhead, it’s important to find out how to set up offshore operations and why. While it’s immensely satisfying to have a presence in your export markets, there’s a lot of research and hard work involved. Find out what’s required.
There’s a certain cachet to say you have an office in some far-flung location. Get it right and your presence could expand your market reach, enhance your supply chain and build on your relationships, but get it wrong and you could face tax problems, legal difficulties and worse.
Types of operations vary—setting up a satellite office will differ from creating a subsidiary, buying a factory, acquiring a business or entering into a joint venture—but you still need to understand the basics before you start looking at paint colours and furniture.
It sounds simple, but first examine the business case for establishing a presence offshore. “There’s no point in having a presence unless you can see some strategic benefit to you that in the end is going to help your business generate revenue,” says Taine Moufarrige, executive director of Servcorp, a network of serviced offices around the world. “People go into markets because they see the boom thinking ‘people are going to buy my product’ and it just doesn’t happen. You need to believe that taking that opportunity is going to make a difference to your business. If it’s not, then don’t do it.”
But if your business case is sound, then by all means start planning by doing your homework.
The office
If you want to set up an office, speak to somebody who knows the environment you’re entering. This could be an Austrade branch in your destination city or country, or another Australian business with an existing presence there. If you’ve been exporting there for some time, you may already have relationships—such as your agent or distributor—you could refer to for advice on what’s required in that location.
“Setting up an overseas office varies from country to country and in some cases from city to city depending on the region you’re in,” says Moufarrige. “We see companies all the time that don’t take time to understand the location and they take a long, expensive route.”
Moufarrige further warns against becoming too engrossed in setting up that you forget your core purpose. “We see people try and do it themselves: they go into a foreign city, they try and negotiate with a landlord, they try and negotiate with a telecommunications company, they try and negotiate with a fitout company. They get distracted by everything going on around that they lose focus on their business,” he says.
To make operations easier, he recommends finding the right business tools, paying particular attention to good infrastructure: “You need to know your phone system is going to work, that your internet system is going to work, and that you have people there to help you on the ground, whether that’s Austrade or chambers of commerce.”
Serviced offices are a good starting point, or in some cases you may be able to attain a place in an incubator office to get a feel for the location before branching out on your own.
Legally there
Assuming your business case is solid, seek professional legal advice to help you work through the due diligence. One of the most important decisions at this stage is the legal structure your business will take.
“Are you going to be using your existing Australian entity to go overseas? Or are you going to adopt a subsidiary model, for example?” prompts Andrew Hudson, partner at legal firm Hunt & Hunt. “This creates a number of issues that overlap with tax, accounting information, and financial information that needs to be provided.”
Types of structures vary in different countries and regions with some easier to set up than others, depending on the jurisdiction. Hudson cites examples such as the USA where it is easier to set up a US subsidiary than it is to become an approved foreign company; in China you can apply to be a wholly owned foreign enterprise.
Structure is important because it will also determine to which government you pay taxes and how much of your revenue you can repatriate. “People often set up structures that involve holding companies, for example in South East Asia, to shift the risk to that entity,” says Hudson. “People also get very excited about low tax jurisdictions like the British Virgin Islands or the Caymans, but how are you going to get the money home? You have to look at things like double tax treaties and the cost of the structure.”
Repatriation varies by jurisdiction. Some countries may have foreign exchange limitations or withholding taxes. “You might have a double tax liability, so you might need to find out whether you need an input tax credit,” adds Hudson. “Also check whether you need to register for VAT [value added tax] or a consumption tax equivalent in other countries.”
Working the land
Be aware that in some places, such as China, you can’t buy land. Hudson refers to a case where one of his clients established a factory there, only to be turfed out when the Chinese government needed the land.
Also check if you need a permit to operate. If the offshore location forms part of your supply chain, you may need an export licence to sell from that country, for example. Similarly, examine whether there are any restrictions to export to your product’s eventual destination as there may be protectionist measures in place between your offshore location and the export destination that do not exist between Australia and the export destination.
Employment is another consideration: will you bring people from Australia or hire locally? Will you need a permit either way? Understand that the employment market may work differently than it does in Australia. “Going into China, there’s a Chinese employment law that makes life easier for the employee rather than the employer,” explains Hudson. “In some parts of China you have to use labour service hire companies and pay them a fee. Often you can’t pay the employees directly.”
A related concern is protecting your intellectual property. “This concept we have about restraining an employee and being able to protect your confidential information doesn’t work the same way in Asia,” he says. “They’re mobile and they have a different view about what belongs to them.”
Hudson recommends identifying and protecting your intellectual property as early as possible in case your popularity has already spawned copycats. “You need to have protection here, and you also need to do the homework to find out how you protect it in an overseas jurisdiction. We have clients who go to overseas markets only to find their trademark has already been ripped off.”
One unfortunate scenario saw one of his clients fall out with a potential distributor who had already registered the Australian company’s trade mark and domain name in the intended country. “You don’t want to deal with someone until you’ve checked them out and the terms of their appointment have been properly recorded,” Hudson says.
At the agreement stage, he also notes you need to make sure you are dealing with legal entities and not just a business name, which carries no legal weight. Then decide on the governing law of the contract and draw up an agreement in writing. “Hopefully you’ll put it in a drawer and never have to look at it again,” he says. “The ones that go wrong are regularly the ones that don’t have a document.”
He suggests nutting out a model agreement with your lawyer that you can present to potential partners. “That gives you some control over negotiations. If you have your preferred document at least you have a starting point. A, you look professional and B, you have your rights set out as to what you expect.”
A model business
If you’re taking your business model overseas, your business needs to possess three non-negotiable traits, says David Stafford, senior consultant with DC Strategy. These are: strong cash flow and profitability; senior executive resources dedicated to the overseas market; and domestic market strength. Above all, however, a business need to be proactive and objective about their global growth to avoid being caught up in a situation where others have too much influence on where and when the business will grow. “Don’t let someone else drive your strategy, let alone a perfect stranger,” says Stafford.
Assuming you’ve taken the appropriate steps to select a country and the business structure, take some time to develop interactions between the Australian entity and the foreign entity. “Who does what; when do they do it; what rights should they have; how can they use the brand; and what can or cannot they do? How is the business to be run?” Stafford lists. “The issue is how much control you want to retain over the business, over the brand; the more control you want, generally the more expensive it’ll be.”
Defining roles and responsibilities also affects financial analysis, which is one of the most underdone areas in developing a strategy to move internationally, he notes. “Most people would look at a single unit on the ground in a foreign country and say ‘I understand what that’s going to be’ but they don’t understand how the network is going to scale.”
Surprisingly, insufficient capital is one of the least common reasons for business failure overseas. Stafford lists a lack of structured systems, using an inappropriate business model and having insufficient senior executive resources as the top three areas for concern.
And if a market requires you to change you business by more than 20 percent, he suggests you reconsider whether that location is right for you. “Ask, ‘what local market conditions would change the way I operate, or the business model?’ Ideally you want to keep 80 percent standard and 20 percent changeable to meet local market conditions,” he says. “If you change more than 20 percent you’re in a mode where you’re changing the fundamental aspects of your model. It’s a different business, and one you may not know adequately.”
What crisis?
While the global financial crisis may discourage new ventures, Stafford says there has never been a better time to expand. As an example, he mentions that jeweller Michael Hill bought 17 stores from a US chain that went bust last year. “If it’s discouraging people they’ve probably not got a bent for it anyway,” he remarks. “What a great time to enter a market, when everyone else is worried about it collapsing.”
Moufarrige agrees that the downturn represents a good opportunity for exporters looking to step up their operations. “If you can get a sense of the market and do your research and get in now, you will be in the right place at the right time because you’ve spent the time to have a look at the opportunities in these down times,” he says. “For SMEs now, because they are nimble, they’re in a strong position to take market share from the big boys.”
Exit right
No one wants to think of failure as they set out on a new venture, but as important as it is to plan the establishment of your overseas operations, it is equally important to consider an exit strategy.
Ask your legal adviser what may be required if you decide to withdraw your presence from a location. Paying out lease agreements, revocation of licences, paying duties, taxes and employee entitlements are some of the more common considerations. Also ensure that you can completely dissolve the entity when you leave so you do not have any lingering liabilities.
