At a certain point in a business’ corporate lifecycle, the question arises as to whether expansion opportunities into new territories should be explored. This is often an exciting question to ask internally, as the prospects for the growth of your business then increase exponentially. However, we recommend (whenever possible) asking ‘the tough questions’ before jumping into your expansion plans – this (boring) exploratory work is all too often overlooked, but may ultimately save you time and money.
Our firm has prepared a basic guidance note for African Expansion (available to any client on request), which is intended to provide an introductory list of questions and considerations for your expansion plans. These considerations are included in this article in a simplified form, and we would encourage you to engage with these before even meeting with the legal and/or accounting professionals who will assist you with your corporate expansion:
- General Considerations
Political, financial, economic and socio-economic considerations, communications, electricity and road infrastructure, language, culture, labour force – these considerations are all too often overlooked when investors and companies scope out opportunities in new territories. These factors may have a massive initial impact on your budget and forecast for expansion spending, and an ongoing impact on your ability to do business in an efficient and cost-effective way. In our experience, these factors are very rarely prohibitive, but we do recommend taking them into account, particularly if specifically relevant for your industry.
- Regulatory Considerations
Consider arranging a meeting with the in-country regulator specific to your industry before commencing your expansion plans, and scope out the regulations which apply to your industry so that you can address these early. Consider visa and work permit requirements, competition law implications, consumer protection laws, and any bilateral and multilateral relationships between countries which might affect you.
- Financial Considerations
These considerations can be broadly lumped into three essential categories: profit extraction, taxes, and exchange control. We have yet to meet a for-profit business which is not ultimately interested in making a profit in a new territory, although of course many businesses have a comfortable buffer in place which enables new territory operations to operate at a loss for an extended period of time. Profit extraction, taxes and exchange control will inevitably have an impact on the best way in which to invest in a new territory, and we recommend obtaining this advice as one of your first expansion steps, in a way which addresses all the relevant considerations of your business type and group structure.
- Corporate Structure and Secretarial Considerations
In general, there are 4 ways in which investors and companies can expand into a new territory for the purpose of commencing business in that territory:
(i) Incorporating a new subsidiary in the local market
(ii) Partnering with an existing local entity or person for a joint enterprise or partnership
(iii) Licensing a product or service to an existing local entity or person
(iv) Acquiring shares in, or merging with an existing local business entity
We recommend carefully considering the costs, implications, benefits and pitfalls of each of these expansion structures before launching your expansion. Some businesses may also want to expand into a new territory to open a branch office or to set up a billing entity without the need for employees and on-the-ground operations: this is often a worthwhile group structuring goal and a less intensive investigation of the above considerations would then apply.
Ultimately, we believe that asking the necessary questions above so as to choose your new market and plan your next steps carefully, will assist your successful expansion. If and when your business finds itself asking itself expansion questions, please feel free to contact our offices to discuss the considerations addressed above in a way that is specifically relevant to your industry.