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Making the jump: how UK tech businesses prepare for overseas expansion

(Image credit: Image Credit: Ra2Studio / Shutterstock)

International free trade is under some of the most intense pressure seen in decades, with the tech industry in particular, facing a number of risks. Brexit, the looming US-China trade war and calls for revenue and transaction-based taxes on digital businesses in Europe, have all contributed to uncertainty for tech companies and investors alike.

Despite this, the UK remains a stable place to domicile as a holding company overseeing an international tech business. It offers a world-class mix of business and developer expertise, competitive regulatory and tax frameworks, and good communications links with both Europe and the US, and we expect this to remain so despite current volatility.

For growth tech firms, the opportunities for expansion are clear: a scalable product combined with access to lower-cost development teams in other world regions provides the twin benefits of new markets leading to revenue growth and a sustainable cost base.

It is crucial that business leaders properly plan and execute their expansion. The process can be costly, with errors causing substantial losses and diverting attention away from the main priority of growing the business.

The value of financial modelling:

Businesses should be crystal clear on their vision for expansion and the components that will drive it. Before addressing management, marketing and regulatory concerns, the first consideration should be whether the financial model is economically justifiable. There are four primary considerations that should form the bedrock of any model: demand projections, cost of customer acquisition, local overheads and set-up costs.

From a revenue perspective, it is crucial to consider the component drivers of revenue growth, beyond the overall growth rate itself, for example subscription or product take-up, attrition rates and price points. Coupled with this should be a consideration of the cost of customer acquisition, with costs of advertising and promotion, partnership agreements and discounted/free trial periods factored into the overall overhead cost base.

Similarly, the initial investment in expansion can be costly and should also be factored in, with equipment purchases, hiring costs, legal compliance, lease deposits and tax payments to contend with, all in a territory where the business may have trading history, brand recognition or supplier credit.

Taken over a period of time, the financial model should therefore demonstrate whether or not an expansion project can ‘recover’ the initial investment through increased sales. This is equally true in circumstances where a business is looking at expansion purely as a means of reducing costs.  Managers should consider whether the savings over say, five years, cover the increased costs in year one (bearing in mind that the longer this period is, the greater the uncertainty, meaning future figures should be discounted as such).

Putting the right systems in place:

With new operations comes the need for new structures and systems. There is no one-size-fits-all approach to system building. A remote sales office will be subject to different motivations and pressures from an overseas development team, for example. Despite this, there is one overarching concern: control.

A foreign operation will naturally be more independent than domestic subsidiaries and branches due to distance, business culture differences, language barriers, different developmental staging and local management enjoying greater autonomy.

Expanding businesses should invest time and effort in building robust monitoring systems to mitigate such risks. Overseas operations should be required to report on a regular basis, maintain records on a common and accessible system, and must be available for routine inspections and audits.

Founders and leaders should remain closely involved, not only at a strategic level, but also when it comes to maintaining relationships. Communication with local teams is vital and whilst it should be clear that they are responsible to central management, their feedback should be listened to and where possible, acted upon. This ultimately reduces reliance on ‘management by numbers’ and, the more freely data and information can flow, the lower the risk is of head office losing control.

Regulatory and compliance restrictions:

When looking to expand overseas, it is crucial to fully understand the local laws and regulations to avoid being caught out. These can vary greatly from country to country, and fall into four broad categories: employment law, taxation, reporting requirements and regulations. The first three will apply to any business entering a new country, while the latter will be particularly pertinent to those handling personal data or operating in the fintech space.

One key recommendation is for businesses to consult with local legal, financial and compliance experts before embarking on expansion. Good advice early on will always pay for itself, particularly when considering employment and sales taxes. By their nature, such taxes give risk to a liability on recurring transactions, meaning that if something is structured incorrectly, an error is made on every sale or every time the payroll is run.

Left unchecked, the financial implications of these errors can be severe. This is especially true of the United States, where each state has its own employment and sales tax regimes, in addition to those imposed at a federal level, meaning there are two levels of legislative compliance to contend with. 

Conversely, many countries now provide enhanced tax deductions for research and development activities, so while it is important to be wary of taxation pitfalls, expanding businesses should also ensure they are taking advantage of all the incentives available to them.

Most law and accountancy firms are members of international networks and will be able to make introductions with accredited local experts at no cost. MSI Global Alliance, for example, consists of over 250 firms in 100 countries, allowing businesses to access coordinated advise both at home and in the country of expansion. This ensures clients receive a global perspective, taking into account any effect on the domestic position.

There are substantial rewards associated with looking beyond domestic markets, however, as with any business venture, there are risks to consider. Tech businesses would do well to prepare methodically and should take advice from legal and financial experts. This will marginally increase the short-term cost of the process, but will de-risk the venture in the longer term, reduce larger future costs and greatly improve the chances of a business succeeding as it scales-up and moves abroad.

Chris Cork, Director, haysmacintyre