Expanding Abroad II: Effective Preparation
Andrew J. Sherman, Partner, Dickstein Shapiro Morin and Oshinsky LLP
Bureaucratic, cultural and economic stumbling blocks to establishing a foreign outpost do not always mean that overseas expansion is ill-advised. On the contrary, a thorough review of the relevant market may indicate that going global holds great potential for your company. If your company has already developed certain structures and attitudes before taking this important step, your move into other countries will be more effective.
Maximize Your Potential
Some of the basic supports of successful international expansion include:
Strong domestic foundation. Make sure you have adequate capital, resources, personnel, support systems and training programs lined up to assist your move abroad. If your business requires technical expertise or multi-language skills, identify employees who have those skills before you start, or locate a source of qualified people to supply them in the target country.
Strategic partners. Finding the right partner may affect the ultimate success or failure of your global operation. Regardless of the specific legal structure you choose for your business ino a particular market, your representative there should always be philosophically and strategically viewed as your partner. Someone with proven financial resources who has already established a successful business in the host country is most likely to be an effective partner for your company. You can use a sales rep, U.S. government agency, networking connection or advertisement to recruit and select candidates.
Precautions.To review the qualifications and credentials of possible partners, get help from overseas credit bureaus, industry associations, commercial attaches at U.S. embassies or consulates. The Internet may also supply information on prospective partners. Always ask for multiple references. Have a fallback plan in case you pick the wrong person or company first time around. And, just as there should always be a dating period before a marriage or a due diligence period before an acquisition, you'll need time to try out the arrangement. There is no substitute for face-to-face negotiations between parties. Try to build a trial period into the contract.
Realistic valuation. Let go of any grandiose ideas about the initial prices that an overseas partner will pay for the right to distribute your goods and services, license your technology or serve as the subfranchisor in their market. Reality and patience are the two key ideas here. If you overprice, you'll scare away qualified distributors or leave your partner with insufficient capital to develop the market. If you underprice, you may lack the resources and incentive to provide quality training and ongoing support. Factor in the cost of translating manuals and marketing materials and of adapting your systems, products and services to meet local demand and cultural differences. The fee structure should fairly and realistically reflect the division of responsibility between you and your partner. Other factors influencing the financial arrangement include currency exchange and tax issues, pricing strategies, market trends and the availability of resources and personnel to provide on-site support.
Adaptation of products and services. Be sensitive to different tastes, cultures, norms, traditions, trends and habits in a country before making final decisions on prices, sizes or other characteristics of your products or services. What works well at home may be experienced very differently abroad. For example, some U.S. restaurant chains had to modify their serving sizes because other cultures value smaller portions at competitive prices and perceive leftovers as wasteful. Conversely, don't change products or services so drastically that quality, integrity, uniformity or consistency are sacrificed.
What's In It for You?
Pick a good reason for selecting a targeted country or market. Loving the culture and climate or meeting a prospective distributor may not be enough to assure profitability. If your company is pulled into a market by someone with a vested interest, make sure there is a real, measurable demand for your products and services.
Be patient in your expectations for return on investment and profits. In addition to normal economic cycles and break-even analysis, certain countries restrict foreign ownership of businesses or dictate legal structures that force you into joint ventures with a local company. Some restrict the ability of a foreign company to pull out capital quickly from the targeted country. It is tempting to try to mitigate potential downstream losses by seeking a higher initial fee, but a more balanced approach to fees and a contract giving you ongoing royalties may yield better long-term results.