What You Should Know When Buying or Starting A Business Abroadbusiness / taxation / Travel
If you’ve started a business or bought an existing one, you know how much planning it takes. The months of market research, plus days of meetings with lawyers and bankers, tax planners, and accountants.
So you can imagine what challenges you’re looking at if that business is in another country.
You can do it, of course. And the more time you spend in the research and preparation stages, the more smoothly your new venture will proceed. Take a look at what some experts and foreign business owners recommend, and plot your own path.
Find Out What You Don’t Know
Research is your friend when buying a business or setting up your own shop abroad. The problem is you often don’t know what you don’t know, and then what you thought you did know … changes.
For example, when American Christos Perakis co-founded the Wi-Fi hotspot provider Zoottle in Greece, he assumed the company would start paying local taxes once it turned a profit, and not before.
Unfortunately, a year after starting the business, he discovered that the regulation was in danger of being overturned so that revenues would be taxed, “regardless of whether you’re profitable.” And that, Perakis told Entrepreneur, “stymies growth.”
Even your ownership of the business you start can come into question. The folks at Expat Info Desk say you need to examine the legality of starting a company. Considerations the following:
- Does your visa allow you to run a business?
- Are there limitations as to the percentage of ownership by foreigners?
- Are you required to have a local co-owner or partner?
In other words, “don’t automatically assume that a right to abode in a country will permit you to start a business that you can own in full,” they write.
Make Sure You’re Ready to Take the Plunge
Maybe people tend to view businesses overseas differently from those at home, with a sort of “jump first, ask questions later” mindset. Overseas property and finance expert Simon Conn tells World of Expats that he’s seen many instances of people plunging into setting up businesses abroad when they really shouldn’t have.
He gives a few examples, which include:
- someone who took over a B&B in Spain with neither previous experience nor customers lined up,
- someone who bought a pizzeria in Portugal with a boyfriend whose “only past experience was running a bar in Greece during his gap year,”
- and a group that wanted to buy a hotel with a business plan that failed to account for a winter low-season slow-down.
Starting or buying a business abroad is not the same as working abroad, and can be extremely costly if everything goes south. In fact, Conn starts his comprehensive list of steps people should take when creating a business plan or feasibility study with the warning:
“Unless you have long-term experience in that profession or have lots of money you can afford to lose, never move to another country and start up a new business.”
Caveat Emptor — Let the Buyer Beware
In any purchase of a business, the onus is on the buyer to check and verify the seller’s claims. When the company you’re buying is overseas, it becomes even more important to ensure you’re getting exactly what you pay for.
You’ll need to perform due diligence, writes Melanie Luff at Businesses For Sale. And the first step there is to analyze the financial reports of the business in question.
Depending on the type of company you’re interested in and its country of origin, you can obtain some of these documents from local government offices. “All limited companies in the UK,” Luff gives as an example, “must register with Companies House … where you can access a business’s latest reports, accounts and financial returns.”
You’ll also need to understand the buying process itself, Caron Beesley at the U.S. Small Business Administration advises.
“As you seek [expert] advice,” she writes, “be sure to ask about the negotiation and valuation process involved in buying a business. What’s included in the sale? You don’t want to be left with a hollow shell of a business when you thought you were getting furniture and fixtures, too.”
Part of the process may also include taking on existing staff as employees or possibly retaining the current owner as manager, writes Mike Handelsman of BizBuySell.
Even if you don’t relocate, you should plan to spend a fair amount of time there initially. “No matter how you decide to manage the business,” he adds, “make sure you have a plan before entering the negotiation phase of the sale.”
It’s a Time-Consuming Learning Curve
It takes longer to grow a business overseas than it does in your home country, HM Risk Group owner Ashley Hunter told Entrepreneur. And she had already worked for large insurance companies in the Middle East before starting out on her own in Bahrain.
“I firmly believe it takes twice as long to grow a business abroad. You’re spending a lot of time just trying to meander through countries and laws and ‘Yes, you can do this’ and ‘No, you can’t do that.’”
Besides international laws and tax regulations, you’re facing a very different market with its own corporate and client customs, infrastructure and financing issues. “Just because you understand the business in the U.S. doesn’t mean it’s going to translate dollar for dollar someplace else,” Hunter says.
A Bit About Cross-Border VAT
For businesses in Europe, there’s a cross-border tax to consider. The value-added tax (VAT) is paid when buying or selling goods or services to other countries. While this may not impact your purchase of a business, you need be aware of the rules in place and how they apply to you.
For instance, you don’t charge VAT if you sell goods to customers outside the EU; however, you are allowed to deduct the VAT you paid on expenses related to that sale.
The Impact of Currency Exchange Rates
If your business is buying from or selling to other countries, you’ll be dealing with a number of currencies. This is when exchange rates become a factor.
Jean-Paul Tennant of the adventure travel company Geographic Expeditions has experience with financial transactions made challenging by unstable local currencies, and shared some of his tips with The New York Times.
To protect your business from sudden exchange rate fluctuations, Tennant says to:
- Extend the quote period from the standard 90 days to six months, if possible.
- Work with a currency trading company. That can help when you are required to pay a supplier in a specific currency. The trading company might give you extra time before buying or notify you when the exchange rate is in your favor.
- Lock in the price or have a backup supplier you can use.
- Stick with your home country’s currency. Even if overseas vendors charge a fee, you’ll be able to plan for the expense.
The Advantages of a Franchise
If there’s a franchise in your country of choice that is doing well, and the market hasn’t yet been saturated, it may an idea worth considering. This is especially true if the franchise has multiple international locations, and is able to help you with the logistics of getting up and running.
Kathleen Peddicord, the founder of Live and Invest Overseas, looked into a franchise business opportunity with Mailboxes Etc. While that particular franchise and the location in question, Panama, may not be of interest, Peddicord noted some general points to think about:
- If your customer base is mostly expats, fluency in the local language is not an absolute necessity.
- If it’s a business that can operate with a small staff, that part of your overhead will remain relatively low.
- All franchises, at home or abroad, offer initial training with ongoing operational support.
Don’t forget to look into businesses in your country of interest that are local franchises. That’s what a couple of Canadians did when they found a bakery franchise called Pan de Vida in Nicaragua. The owner had already sold one location to another expat couple and helped these new owners with everything from building the brick oven to branding and marketing.