Expanding into a new country can open the door to new customers, stronger growth, and long-term opportunity. But it also comes with many considerations, including international tax rules, data privacy requirements, political and economic uncertainty, and global supply chain issues.
For many companies, buying a foreign business can be a practical way to enter a new market, giving them access to local customers, an established brand, and built-in market knowledge. At the same time, it requires careful planning and a clear understanding of local regulations, business customs, tax considerations, and the challenges that come with managing operations across borders.
The benefits of entering new foreign markets
The decision to enter a new foreign market is a strategic move that demands thoughtful consideration and a willingness to adapt. However, for companies willing to embrace the challenges and uncertainties of international expansion, expanding into new territories offers many advantages.
Gain access to local talent and intellectual property
In addition to benefiting from a well-known local brand, your business may be able to bring on experienced local employees and gain access to valuable intellectual property.
Bypass legal and regulatory hurdles
With an international business acquisition, you can effectively bypass many of the legal and regulatory hurdles of setting up a new company in foreign country. This is because you are acquiring an existing foreign entity that has already met all regulatory requirements and secured the licenses required to operate a business.
Confirm there is already demand for your product or service
Designing products or services that respond to customer needs in foreign countries can be difficult due to cultural and other differences among countries. The introduction of a product or service in a new country always carries the risk that it will not gain traction. Your acquisition strategy can eliminate this risk since the acquisition target will have already established that customers want a particular product or service.
Build on an established market presence
Buying an existing foreign company can help you enter a new market faster and with more credibility than starting from scratch. Instead of spending years building brand awareness, customer relationships, local operations, and market knowledge, you can step into a business that already has a foundation. That can make it easier to introduce your products or services, reduce the risk of entering an unfamiliar market, and build momentum more quickly.
Reduce competition before you enter the market
Acquiring a foreign company can also be a strategic move that neutralizes a potential competitor — rather than starting a new foreign business that may have to compete with an established business.
Benefit from economies of scale
International expansion — whether by exporting, opening a new subsidiary, or buying a foreign business — may increase your sales volume, which can help your business operate more efficiently and cost-effectively.
Diversify your revenue streams
Your company can take advantage of new revenue sources while reducing its dependence on one market, customer base, or economic environment. If demand slows in one country, revenue from another market may help create more stability and support long-term growth.
What makes cross-border mergers and acquisitions challenging?
Cross-border M&A can be more complicated than domestic deals because you’re not only evaluating the business itself, but also the country and environment where it operates. Differences in tax rules, employment laws, regulatory requirements, culture, currency, data privacy, and business practices can all affect whether the acquisition is successful. These challenges do not mean a foreign acquisition is a bad idea, but they do make planning, due diligence, and local expertise especially important.
Choosing a foreign market for expansion
To find the right market for an international business acquisition, your business should consider essential factors such as market potential, business climate, transportation infrastructure, economic, financial, and political stability, and culture. Additionally, currency considerations, labor market availability, supply chains, and regulations all play a major role.
Being as specific as possible about the criteria will help you find the right market for acquisition. Pay attention to countries that have favorable laws, a skilled workforce, reliable infrastructure, stable economic conditions, and a business environment that supports long-term growth.
Working with 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 critical considerations at play and assess the most attractive markets for a strategic business acquisition.
Finding and evaluating an acquisition target
Once you’ve chosen a market, you’ll need to find a target company that meets the following criteria:
- Strategic fit: Look for alignment in goals, access to your target regions and customers, cost efficiencies, and complementary products or technologies.
- Industry positioning: Consider how the company is viewed in its industry and whether its reputation, niche, or competitive advantages support your growth goals.
- Market share: Review how much of the local market the company already serves and whether there is room to expand after the acquisition.
- Management team: Evaluate whether the current leadership team has the experience and knowledge to support a smooth transition.
- Customer concentration: Pay attention to whether the business depends too heavily on a small number of customers, which could create revenue risk.
- Culture: Having compatible company cultures can help with integration post-acquisition.
- Financial health: Understand the company’s total financial picture to ensure you won’t face negative surprises.
These key factors can help you narrow your options, but they’re only the starting point for a deeper review of the business.
Conducting cross-border due diligence
Once you have chosen an available target company but before a Sale and Purchase Agreement (“SPA”) has been signed, it’s time to start the due diligence process.
Effective due diligence is the backbone of successful international acquisitions. 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. The Quality of Earnings (QoE) report is a key deliverable in this process that tells you whether the target company’s earnings are sustainable, reliable, and reflective of how the business is actually performing.
When acquiring a foreign company, you will also need to ensure compliance across jurisdictions. Verify that the target company has complied with local tax laws, employment rules, licensing requirements, data privacy regulations, industry-specific obligations, and any other legal standards that could affect the deal or create unexpected risk after closing.
Engaging expert transaction advisors with a deep understanding of international acquisitions and local markets and their business practices is crucial to find any hidden risks and ensure an accurate valuation of the target business.
Planning the transaction
While the due diligence phase is happening, you also need to plan 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 international tax advice is essential to handle matters related to the acquisition transaction.
Integrating the target to achieve an efficient cross-border structure
Once the 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 goal should be overall operational and tax efficiency for the combined group.
Questions that will be addressed in this phase typically include figuring out roles and relationships among group entities. For example, how will the new business operate alongside the parent company? 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?
There are also other options, like making the target a limited risk distributor that earns a small margin, with most profit recognized at the parent level. Each of the above alternatives may have 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 assigning to each entity the assets, business functions, and risks consistent with that model; and determining the geographic sales/services footprint of each entity.
Planning the global management function
How the acquired business is managed will depend on the overall goals of the organization and the resources available across both companies. In many cases, the parent company takes the lead in setting the strategic direction for the combined business, while key leaders from the acquired company continue to play an important role and may even serve on the parent company's leadership team or board.
In other situations, it makes sense to give the acquired company more independence. This is often the case when its products or services are highly specialized or when success depends on a deep understanding of the local market. The existing management team may be best positioned to make day-to-day decisions and respond to customer needs in their region.
Another important consideration is how accounting and financial reporting will be handled after the acquisition. Sometimes the parent company's existing systems can be expanded to include the acquired business. In other cases, the companies may need to implement new processes or adopt a different platform to support the needs of the combined organization and provide consistent financial reporting.
Buying a foreign business can be a powerful and transformative step toward global expansion and revenue growth, giving you access to exciting market opportunities and strategic advantages. However, the path to global success requires careful planning and expert guidance. Working with experienced international tax and accounting advisors on each phase of the transaction is the key to achieving a successful acquisition.