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As the UK Government continues to slash public sector spending, a key strand in its economic growth strategy lies in encouraging the private sector to expand. With much of this growth potential in overseas sales it’s important that companies take the right approach in setting targets and budgets, particularly when it comes to the export market.
So you’ve got a good product and you’ve even done your research on the best target market overseas. The next step is to come up with a realistic sales plan. Unfortunately, it is at this point that many companies let their hearts rule their heads. It’s an all too common theme witnessed by Mazars’ Corporate Finance Partner, Mark Standish, and his team. “Most companies tend to be overly optimistic when they’re looking at new ventures. They get excited about the potential, which clouds their judgement and they become too ambitious about the speed at which sales are going to be generated,” he explains.
On the other side of the balance sheet, companies are also too skimpy when forecasting costs that an overseas expansion can incur. “More often than not, costs tend to be far more than ever anticipated. We quite often see a venture that is not properly capitalised at the outset, which means the company runs out of money before the project is given a chance to work,” says Standish who has sadly seen far too many UK companies bear the scars of the US venture that didn’t work, or the European excursion that was a dismal failure. “Quite often it was the right venture at the right time, but they hadn’t been realistic enough in their sales’ expectations and hadn’t put enough money aside to make it work."
To succeed at overseas expansion, a company not only needs persistence and perseverance, but to be realistic about costs. Standish’s experience is revealing. He says he sees situations where a company plans to set up a US operation, for example. They will construct a budget and decide they need £500,000, but frequently it’s not enough. “They’ll go to their bankers or their financiers or their internal board, to secure the funds. But then they return a year down the line, saying they’ve spent the money. Sales have been disappointing and their costs have overrun, which means they need another £500,000.”
The bank refuses and the project falls flat. But, says Standish, it could have worked out if more time and thought had been given to initial budgets. “Had they asked for a £1m in the first place, they then might have given themselves twice as long to make the project work,” says Standish.
He believes that once an overseas expansion plan has been hatched, that businesses should do a ‘reality check’. “Talk to whoever helps you in the business, get a view from someone who stands outside the actual excitement of it all and aim for a realistic assessment of your project,” he says.
In addition, companies often overlook exploring a variety of financing arrangements, which they can tap into. For straightforward exporting arrangements, for example, Standish points to the specialist trade finance houses, and specialist international banks who can assist with financing through letters of credit and stock finance.
Volatility in the foreign exchange markets is also not taken into account enough, despite the fact it has the potential to eat into profits or, at worst, cause a company's project to fail. Standish believes it is important to either hedge the risk with formal instruments, or else minimise it using good business practice such as negotiating terms in your favour. “Let’s say, you’re selling to a supermarket whose sales are in euros, but your costs are in sterling. To minimise your currency risk you have to sell to the supermarket in sterling. It’s simple, but it’s often overlooked when it comes to negotiating terms,” says Standish.
Standish says supermarkets, in particular, have become much more sympathetic to the plight of suppliers. “It’s not uncommon for even small companies to negotiate the sort of terms that take exchange rate risks altogether out of the business.” Standish gives the example of a salad producer based in Spain. After negotiations with a major high street retailer in the UK, the salad producer can now sell all his produce in euros whether he sells to retailers on the continent or in the UK. Now that’s good business.
For more information on financing visit www.businesslink.gov.uk
Structuring a company for overseas expansion may be done in a number of ways, so it’s important to make sure you choose the right one for your company.
Companies have a choice when they are looking to sell products or services overseas as to whether they use an agency arrangement, or they look to route their products and services through an established trader who operates in the chosen market. But perhaps the biggest decision for many companies will be when to open a subsidiary overseas.
A huge number of issues come into play at this stage, but the first one has to be - is your company ready for such a semi-permanent move? “You have to tread very carefully with regards to repatriation of profits and earnings to make sure you don’t infringe Revenue and Customs guidelines or find out you’re paying too much tax in too many countries,” explains Mazars’ Corporate Finance Partner, Mark Standish.
For those companies who opt to set up a number of overseas’ subsidiaries, then tax planning opportunities arise. This may well involve reviewing the entire corporate structure to assess where the company should be basing most of its revenue generation and profit-taking, explains Standish. He warns that great care and expert advice should be taken when making such plans.
“When it comes to a physical move, the Revenue now insists that a company does fully relocate. Whereas before people might have paid lip service to being non-resident, the rules have been tightened.”
Done properly, however, moving corporate headquarters to follow the underlying business can be a straightforward process and is a way for medium-sized companies to make their operations truly international. Standish gives the example of business owners who have successfully moved outside of the UK, some basing themselves in Dubai and others in Hong Kong.