Matter & Substance
  September 7, 2023

Guidelines for Achieving a Successful Foreign Business Acquisition

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.

Immediate Access to a Recognized Brand

Unlike exporting, this model permits a business to benefit from a locally recognized brand that has achieved customer loyalty and that will make it easier to introduce new products or services.

Bypass Legal and Regulatory Hurdles

An acquisition strategy also effectively bypasses much of the legal and regulatory hurdles of setting up a new company in foreign country since an existing foreign entity will have already completed all regulatory requirements and secured licenses required to operate a new business.

Bypass Risk of Local Country Acceptance of Products or Services

Designing products or services that respond to customer needs in foreign countries can be difficult due to cultural and other differences between one country and the next. There is always a risk that the introduction of a product or service in a new country will not gain traction. The acquisition strategy eliminates this risk since the acquisition Target will have already established that a particular product or service can gain traction in a foreign country.

Reduce Commercial Risk by Leveraging Existing Client Base & Distribution Channels

Acquiring a business can mitigate some of the commercial risks of introducing a new product or service in a foreign market. For example, where the U.S. company plans to market its U.S. based product or service in the new foreign market, the acquisition of an existing foreign company with an established brand should facilitate and provide momentum for the introduction of the new product or service by permitting the home company to leverage the foreign company’s brand loyalty, distribution channels, customer base and overall knowledge of the local market.

Benefit from Neutralization of a Competitor

The acquisition of a foreign company may also serve the strategic purpose of neutralizing a potential competitor as compared to starting a new foreign business from scratch that may have to compete with the established foreign business.

Benefit From Economies of Scale

Whether exporting, setting up a new subsidiary or acquiring a new foreign business, these strategies should permit an increase in sales or service volume, there by permitting the company to leverage economies of scale.

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

Once the acquisition transaction has been carefully worked out and an SPA has been signed, the next step is to map out the plan for aligning and integrating the target entity operations and supply chain with the parent company to achieve a coherent and efficient business model. The objective should be to achieve overall operational and tax efficiency for the combined group.

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: (i) assigning to each entity the assets, business functions and risks consistent with that model; and (ii) 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.

At Mowery & Schoenfeld, we have access to a global network of approximately 650 accounting and law firms in over 120 countries across the globe. Our dedicated Transaction Advisory practice focuses on helping business entrepreneurs through a successful search process. Since that time, we have worked with over 250 searchers in successfully finding, purchasing, and operating a business. Reach out to your tax advisor today if you would like to learn more about our international business planning services.