In our era of ever-increasing globalization of commerce, businesses enjoy substantial opportunities to reach new markets and customers beyond their domestic borders. Buying a foreign business presents a promising avenue for expansion, offering access to new markets, diverse customer bases, and strategic advantages. However, such a venture demands a comprehensive understanding of international regulations, customs, and tax issues, as well as a methodical approach to overcome the unique challenges of managing a company from afar.

Exploring the Advantages of Entering New Foreign Markets

The decision to enter a new foreign market is a strategic endeavor that demands careful analysis, foresight, and a willingness to adapt. Whether driven by the quest for growth, diversification, or the need to stay competitive, venturing into uncharted territories can yield a plethora of advantages for companies willing to embrace the challenges and uncertainties of international expansion.

• Access to a Recognized Brand: An acquisition provides the benefit of a local brand with established customer loyalty, easing the introduction of new products or services.

• Bypassing Legal Hurdles: Acquiring an existing foreign company allows you to skip the regulatory steps of setting up a new entity, as the acquired business will already have the necessary licenses.

• Reduced Risk of Market Acceptance: The target company has already proven that its products or services are viable in the foreign market, eliminating the uncertainty of market entry.

• Leverage Established Distribution Channels: An acquisition provides immediate access to the target’s customer base, brand loyalty, and local market knowledge, reducing the risk of launching new products or services.

• Neutralizing Competitors: Buying a foreign competitor can eliminate competition, compared to building a new business from scratch.

• Economies of Scale: Expanding through acquisition can increase sales volumes and leverage economies of scale, enhancing cost efficiency.

Selecting a Foreign Market

The process of selecting the right market for a foreign acquisition demands careful consideration of numerous factors, including market potential, business climate, transportation infrastructure, economic, financial, and political stability, culture, etc.

To pursue a foreign market, selecting an advisor who is familiar with international business considerations can be extraordinarily helpful. With someone who understands the market, a company can more accurately evaluate the above considerations and assess the most attractive markets for a business that wants to make a strategic business acquisition.

Once an available target company has been identified, but before a Sale and Purchase Agreement (“SPA”) has been signed, it’s time for the Acquiror to undertake due diligence of the target.

Undertaking Buy-Side Due Diligence

Effective due diligence is the backbone of a successful foreign acquisition. Beyond assessing the target company's financial health, due diligence must delve into legal compliance, contractual obligations, intellectual property rights, and potential tax and non-tax liabilities. Engaging expert advisors with a deep understanding of local markets and business practices is vital to unveil any hidden risks and ensure an accurate valuation of the target business.

Planning the Acquisition Transaction

Simultaneous with the due diligence process comes the step of planning the acquisition details. For example, should it be a stock or asset acquisition? Each option carries different tax and legal implications. And who will purchase the target entity? In some cases, it will make sense for the parent entity or its owners to buy the foreign business. In other cases, tax, legal or strategic considerations may call for setting up a domestic or foreign holding company to make the acquisition.

Employee stock options for target personnel can also be determined during this period. Since tax considerations can inform the ownership structure and overall cross-border business model of the combined businesses, expert tax advice should be obtained to assist with matters related to the acquisition transaction.

Integrating the Target to Achieve an Efficient Cross-Border Structure

Post-acquisition, integrating the target into the parent company is crucial for operational and tax efficiency. Questions that will be addressed in this phase typically include matters related to roles and relationships among group entities. For example, what will be the operating model of the new business vis a vis the existing parent? Will the target be a principal company that manufactures and sells goods with little interaction by the parent? Or should the target company buy from the parent company and then resell to foreign customers?

A third option might be for the target to be a limited risk distributor that earns a small margin, with most profit recognized at the parent level. Each of the above alternatives may have quite different tax implications and the best approach will depend on a variety of factors and considerations.

Once an operational and tax efficient business model has been designed, the next steps will include:

1. Assigning to each entity the assets, business functions and risks consistent with that model; and
2. Determining the geographic sales/services footprint of each entity

Planning the Global Management Function

Effective management of an acquired foreign target will depend on the overall group strategy, as well as the resources available at each relevant entity. Following an acquisition, it’s not uncommon for the parent company to control the strategic direction of the combined group, but with some executives of the target serving as directors of the parent.

In other cases, as where the products or services in the foreign location are highly customized and the marketing activities are specially tailored to the local market, it may be best to let management at the foreign entity exercise substantial autonomy consistent given their intimate knowledge of the local market.

Another key issue related to the management function is extending the parent company accounting and financial reporting systems and capabilities to the acquired target. In some cases, the parents existing accounting and financial reporting system can extend to the target. In others, it may be necessary to devise or adopt a new system.

We’re Here to Help

Buying a foreign business can be a powerfully transformative step towards global expansion and revenue growth, offering access to exciting market opportunities and strategic advantages. However, the path to global success requires careful planning and expert guidance. Collaborating with experienced international tax and accounting advisors on each phase of the transaction is essential to achieve a successful acquisition.