When should South African companies look overseas?

Overseas expansion is the top strategic growth priority for a growing number of South African companies. If they are to maximise the potential benefits of such a move and build profitable and sustainable business in foreign markets, it is not only essential to ensure that the investment is structured correctly but also to get the timing right.

South Africa boasts many successful multinationals and their achievements demonstrate how firms from developing countries can prosper abroad, especially in emerging markets, which they understand and can sometimes navigate better than their competitors from more economically developed countries.

Overseas expansion enables businesses operating in a saturated domestic market or experiencing a shrinking market share to find new outlets for their products and services in another country. It will provide access to a new base of customers and will also generally help to build greater brand recognition internationally.

And of course, having a presence in more than one country ensures a firm is not reliant on the health of just one country’s economy for its success. Many businesses expand internationally to diversify their assets, an action that can protect a company’s bottom line against unforeseen events by spreading risk. Companies with international operations can offset negative growth in one market by operating successfully in another.

Another important advantage of an overseas operation is that it offers the facility to hold trading capital in hard currency without the need for a customer foreign currency account in South Africa and the attendant issues of permissions, forex fees and being subject to the volatility of the rand.

In addition, a new country may also offer more favourable economic conditions than the home country, including more business-friendly regulation, lower costs and lower taxation. Foreign governments typically also offer incentives for setting up a business operation that will boost its economy and create local employment.

The risks are significant, of course. Firms have to really understand the markets they are entering. Adequate preparation and research need to be done to find appropriate opportunities overseas. Identifying the best overseas location will depend on a range of factors, including accessibility, infrastructure, time zone alignment, labour availability and cost, exchange controls and access to robust legal and regulatory systems.

Any foreign investment needs to be structured correctly if the opportunity is to be fully realised. With over three decades of experience handling cross-border corporate and commercial matters, Sovereign’s corporate services include forming new corporate structures, reorganising existing structures and repatriating earnings.

Modes of entry may vary – Internet, exporting, licensing, commercial agents, distributors, strategic alliances, joint ventures, overseas manufacturing or sales subsidiaries – but international expansion will inevitably involve unfamiliar legislation, regulations and processes, as well as creating international legal and tax considerations.

Non-resident structures – sometimes called ‘offshore’ companies – may offer a more secure and stable legal platform because they are governed by a reputable law system. They may be used to operate a business in another country or to separate a domestic business from an overseas subsidiary. They may facilitate the diversification of investments or, where investments are spread across many countries, they may be used to simplify administration.

Whether you are expanding your business in Africa, Europe, Asia, the Middle East, the Americas or elsewhere, Sovereign will set up the best trading structure for your business. We will assist you to select the most effective and efficient legal entity, and will then form and register that entity in line with local laws and regulations.

We also offer the necessary expertise in administering and managing companies, including company law, board procedures, director responsibilities and shareholder relations, and financial and corporate compliance requirements. This will enable a company’s owners to focus on the primary business.

Timing is also critical. Many businesses ask us whether it is better to pursue overseas expansion at the earliest opportunity or to wait and build a brand and a critical mass of clients in South Africa. In today’s global marketplace, business success increasingly requires active trading participation in foreign markets and we would generally advise clients to make the move as soon as they can, but this is not always possible given the constraints of cash flow and the need to minimise risk.

The bottom line is that taking your company overseas is not for everyone. It’s not just a matter of setting up a ‘shell’ company or a ‘brass-plate’ operation: the clear intention should be to add substance to your company from the word go. This will entail hiring local employees and leasing premises, while at least one director should consider a move to the new location to manage the business.

Most of all, though, don’t go it alone. Expert advice is critical, from advisors who have a first-hand knowledge of overseas markets, tax regimes and legal and regulatory systems. They will help you to ask the right questions and make the right decisions for your company in the long-term.

Contact Richard Neal
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