When developing your business in a foreign market or region, you might consider establishing a more substantial operation. This can be for a variety of reasons such as lower costs, increasing market penetration, improving customer service and complying with government regulations.
Most firms only set up an overseas operation after testing the market. This can be a logical progression from working with an agent or distributor as a company grows its sales. There may be a demand from customers that the exporter has a local presence, and to win government contracts this could actually be a requirement.
In most countries around the world there are government-backed economic development organisations ready and willing to support setting up a more permanent base in the local market. They will be able to help with advice, support and introductions to other companies who have set up similar operations.
Tips from our trade advisers
- carefully select the best market
- undertake a full feasibility study to show costs and returns
- research set up time – some countries are quicker than others
- seek advice from expatriates already working in the country
- engage a local lawyer to provide legal advice before setting up
- use an experienced accountant to advise on incorporation, business tax, payroll, VAT and repatriation of profits
- investigate office premises, employee residences and bank accounts
- consider who will run the operation. For example an existing manager willing to relocate will understand the company’s ethos, products and services
- create a launch plan and timetable to monitor and review progress
- make an exit plan for a potential future closure
Types of overseas operations
Setting up an overseas operation involves some form of direct investment. There are five main options.
This involves setting up an overseas office address and phone number, using a managed office facility. A virtual office provides a fully serviced workspace, with a receptionist to answer your calls, without the capital expense of owning, leasing, and equipping your own office. This can be a flexible low-cost option to start up an operation overseas. However, this approach will probably only work short term.
Local representative office
This is an overseas office established to conduct marketing research or customer liaising activities. This is generally easier to establish than a branch or subsidiary. Companies often use this type of set up in emerging markets such as China, India and Vietnam. They have the restrictions of not being able to invoice locally for goods or services.
A branch can sell directly to the market, promote the brand, and conduct business in its own name. However, as it’s not a legal separate entity the UK parent company remains fully liable for its activities.
Wholly owned subsidiary
This is an incorporated entity created in the overseas country. There may be tax advantages and as a limited liability company it provides more credibility with banks, service providers, and partners. However, there can be conflicting interests and objectives between the local subsidiary and the parent company. Additionally, this is a major investment and therefore whilst providing more control it is a higher risk than the other options.
This is the purchase and complete take over of another business in your sector, and can be an important way of growing your business in an overseas market. You have immediate access to more customers and have a local set-up. However, the culture and values of your UK business may clash with the locally engaged staff of the business that you acquire, so this should be carefully managed. Again this is a major financial commitment and there is considerable risk if the acquisition goes wrong.
To get ready for setting up a business abroad you will need to think about the following steps.
Step 1: Identify the set up opportunity
Taking the following actions will help you identify if there is an opportunity to set up a business abroad:
- research the target market and city thoroughly, and consider any alternatives
- undertake a feasibility study of the set up which answers key questions. For example: why set up, why is it the right location, does it make commercial sense, will it justify the additional costs?
- make a business plan for the first year. This should include the mission, objectives and scope of the business entity, projected costs and profits for the first year, a staffing plan, and how you will approach any market regulations or legal considerations
Step 2: Establish the business abroad
Taking the following actions will help you to establish the business abroad:
- investigate office premises, factory sites and employee residences to find the right premises
- meet and discuss with other UK businesses who have already set up in that market to seek practical advice
- engage with local lawyers, accountants, and banks with appropriate knowledge and experience to obtain legal and financial advice
- consider who will run the business – it is worth identifying if there is any existing UK-based manager willing to relocate
Step 3: Manage the new business operation
Taking the following actions will help you to manage the new business operation:
- communicate clearly and often – at least in the first year set up frequent phone calls, and visit regularly
- consider the most effective systems for staying in contact and receiving reports such as an integrated customer relationship management system, logisitics tracking for deliveries, and translation software
- be aware of cultural differences – understand what is important to the staff and try to accommodate and adapt your approach
- in some countries loyalty and attrition are an issue. For key staff consider an incentive scheme to tie them in
- review how the operation is progressing as adjustments and changes may need to be made.