Trading one’s goods overseas has been part of human evolution, of cultural development, and is the foundation of our global economy. But, as the long-running notion of “globalisation” is challenged by whispers of political protectionism, companies are facing increasing challenges to enter new territories.
Jonathan Arrowsmith, managing director, Business Services; Ciara O’Neill, managing director, Debt Advisory; Edward Godfrey, executive director, Debt Advisory; and James Nichols, director, Business Services at DC Advisory explore the current climate and provides insights for navigating the route to overseas expansion, including:
• Selecting your market
• Organic growth versus M&A
• Evidencing your international “story” for lenders
• Key FX challenges
Selecting your market
International expansion is not on the agenda for all businesses. Often, it happens organically – clients move to a different country and retain your services, or demand increases in a particular region for your product. Whatever drives the growth, it’s essential to perform due diligence on a prospective market wisely. A few key steps:
– Assessing the competitive environment: making sure you understand who you will be competing against – research into competitors’ relative strengths of brand, market position and products / service
– Identifying barriers to entry: ensure you understand if your target market has similar characteristics to your own, or will you need to adapt your business model
– Assessing the regulatory environment: compliance requirements differ by country; make sure you understand how you will operate under your target market’s laws and regulations.
Organic growth versus M&A
The findings from your market due diligence should inform the feasibility of organic growth, or whether investigating an M&A approach makes more sense. Barriers to entry such as a fierce competitive environment, protectionist government policies, or a burdensome regulatory environment for foreign operators, could mean failed attempts to penetrate the market. It can often be better to enter a new market by way of M&A, where buying an existing established business, which knows its customers, suppliers and the competitive landscape, can arguably de-risk your entrance into the new market.
Evidencing your international “story” for lenders
Whether you opt to grow your business organically or via M&A, most businesses need additional capital to pursue their ambitions. Navigating the debt market can be intimidating, with an ever-growing potential lender universe and increasingly complex financing documentation. Choosing the right partner(s) to support any international strategy is a critical decision to get right.
Carefully positioning the “story so far” alongside the “international vision” with potential ending partners is key. Management and shareholders play a crucial role in explaining the investment opportunity and evidencing a credible and deliverable expansion plan. Lenders will diligence not just the credit proposition but also the management team; and in particular, the track record of successfully delivering acquisitions or international growth. Companies need to demonstrate their track record of realising growth in “home” markets, their ability to replicate such growth in new ones and evidencing that there is sufficient whitespace or acquisition potential in the company’s target markets.
Furthermore, the types of growth strategy – M&A or greenfield, target geographies, if the business is core or complementary, and sector tailwinds – are all essential considerations which will be analysed in detail.
Ahead of any debt capital raise, preparation is key: it will be important to thoroughly stress test plans before approaching lenders. In particular, careful assessment of potential FX implications for the business should be undertaken. Thorough preparation will ensure the company identifies the “right” partner to support their international ambition, secures the best terms in the market, and negotiates appropriate documentation flexibility.
Key FX challenges
Even domestic businesses cannot escape the perceived impact of Brexit on the value of sterling. Whether a consequence of inbound suppliers “costing more” or overseas consumers “paying less”, businesses have had to pay close attention to the effect of FX on balance sheets and plan ahead.
As you grow overseas, the importance of managing your currency exposure becomes more important and with it the need for increasingly sophisticated strategies.
This article was written by Jonathan Arrowsmith (managing director, Business Services), Ciara O’Neill (managing director, Debt Advisory), Edward Godfrey (executive director, Debt Advisory) and James Nichols (director, Business Services) at DC Advisory.
DC Advisory is a proud sponsor of the Amazon Growing Business Awards.
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