Export or Overseas expansion?
Opening an operation in a foreign market will usually require significant resources and involve greater administrative and managerial burdens, but the rewards could ultimately be greater. Considering the associated challenges and risks, when should a business weigh up overseas expansion over exporting? Andrew Symmonds, Investment Director at Maven, looks at the considerations any company at this juncture should have deliberated over.
Any size or type of business has the potential to export, and in the UK this strategic action is on the increase. In their pursuit of continued growth many private businesses, of all sizes, are looking overseas for new opportunities and exporting into these new markets has the potential for rich rewards.
However, there is often an inflection point for the effectiveness of export-led growth. Hypothetically, if ABC Manufacturing Ltd exports a product or service to a country outside the United Kingdom, it is likely to have, at some point, faced the conundrum of whether to continue exporting or to take the leap and consider a different operating model.
There are several common options available to ABC Ltd:
- Partnering – ABC could set up an agreement with a local business, either under a license or via a commercial arrangement to offer their services through the partner business’ sales channels.
- Joint Venture (JV) – ABC could set up a legal entity with another business, on a joint ownership and resource basis, to market their products and services together.
- Acquisition – ABC could look to acquire a business with similar or complementary services or products, which is either based in the UK and has an existing operation in the target region, or is based in the region itself.
- Setting up an overseas unit – the best option may be to set up an operation in the region through a fully owned subsidiary, with local management at the helm.
Partnering has the advantage of requiring relatively low levels of investment and ABC’s foothold in the region could slowly grow with a relatively low level of risk to the organic business. On the other hand, the rewards and rate of growth could also be slow and uncertain, often largely depending on the local partner’s drive, growth and desire to sell ABC’s products or services. Whilst the partner’s performance and willingness can be influenced by appropriate incentives to stimulate growth in that market, it will inevitably lead to a reduction in the margin usually enjoyed by ABC on its products and services.
A Joint Venture can be beneficial as any set-up investment is shared and resources are pooled. However, it can also be problematic due to the obvious potential for issues arising through strategic or operational goal divergence between the management and/or shareholders of the two businesses. A JV can often be the precursor to one of the next two options.
Expansion through acquisition has the benefit of ABC being able to identify and acquire the most appropriate business(s) to help fulfil its strategic goals. If ABC is successful, for example, in cross selling its services through the target’s customer base, or using the target to improve their own offering then there should be clear growth benefits. However, it is critical to focus on the cultural aspects of acquisition as well as the commercial benefits. Acquisitions often go wrong through a lack of understanding of business practice in the local market, leading to poor integration with local management as well as slow and ineffective implementation of the post-acquisition plan.
Setting up an operating subsidiary overseas can seem very daunting and may require significant investment and working capital. However, in certain cases, this may be the best option as the new operation can be built using a blank canvas, utilising the experience and knowledge of the existing management team. This option for overseas expansion is very often in response to major customer enquiries or the winning of a large new contract to help cashflow in the early months. A wide range of issues need to be considered when setting up overseas and, whilst the following list is not exhaustive they are some factors which should be considered very early in the process:-
- Cost – what are the set up costs for an overseas unit?
- Management and administration – how will it be managed and administered effectively? Would that involve local or existing UK resources?
- Control – how will the ‘parent’ control the ‘child’? Who will manage the cash collection and control?
- HR/Visa issues – it’s crucial to understand local employment laws and visa rules
- Legal and regulatory issues – any appropriate local law, compliance and regulatory issues should be considered, and appropriate processes implemented.
- Tax issues – advice should be sought on local tax laws and implications with UK tax law.
Even after all the issues are explored, the decision may still be uncertain. What is certain however is that, at some stage, the scale of ABC’s export business may mean the current business model needs to evolve.
There are four recent examples of successful expansion strategies in Maven’s portfolio which I have been involved in:
Cursor Controls (Cursor) is a developer and manufacturer of human machine interface devices for some of the world's most demanding environments. When Maven invested in July 2015, the business designed and manufactured a range of leading edge products, including trackballs and touchpads, to a UK and international customer base from its headquarters in Newark-on-Trent, Nottinghamshire. An existing supplier to Cursor, Belgium based NSi, a manufacturer of ruggedised keyboards, had been identified during the acquisition process as a potential target. The acquisition of NSi was completed in 2016 and provided a broader customer base for the enlarged group. It also facilitated closer technological cooperation between the two businesses, enabling the group’s product offering to increase in complexity and value and opening up numerous cross selling opportunities. When Cursor was sold in October 2018, generating a 2.7 x return for Maven investors, revenues had doubled to over £9.5 million, with 90% of its sales to international customers across more than 30 countries.
In 2016 Maven led the management buyout of South Wales based Indigo Telecom, which was delivering turnover of £12 million and EBITDA of £1.3 million. Whilst the business had operations in the UK and Europe, a key strategic objective was to be able to offer a global service to their existing customers and to attract new customers in overseas markets. An acquisition target had been identified during the investment process, which offered a complementary set of services and access to new geographical locations not currently supported by Indigo. Belcom247 was acquired in September 2017, to form the Indigo-Belcom Group. The management team completed a swift and thorough integration process, enabling the group to offer a truly global service to an enlarged customer base. Financial and operational performance improved dramatically post acquisition and, when Indigo-Belcom was sold in December 2018 with a 4.2 x return for Maven investors, revenues had increased to over £30 million and EBITDA to over £4 million.
GEV Group, headquartered in Hull, is a diverse energy services business with a key focus in the wind power renewable market and principally provides inspection, repair, retrofits and paint repair services for wind turbines. Maven led the buyout in 2015 and at the time GEV had customers predominantly in the UK and Europe which typically had a viable operational period of April/May through to September/October due to adverse weather conditions. The board identified that the operational period in the US would provide a valuable counterbalance to that of Europe, and made the strategic decision to enter the US market and set up a subsidiary operating in Houston, Texas. The operation benefitted from some early contract wins and continued to provide significant additional revenues in the winter months between October and April. This enabled GEV to grow significantly and the business was sold in July 2019, generating a 2.7x return for Maven investors, at which point revenues had doubled to over £15 million and the group was delivering EBITDA of over £3 million.
In 2012 Maven supported the MBO of Cat Tech International (CTI) from US environmental services business Clean Harbors Inc. CTI is a leading provider of industrial services to oil refineries and petrochemical plants across several major international markets and in 2012 was operating from offices in UK, Bulgaria, Sweden, China, Singapore and Thailand. The business was initially prohibited, under the terms of the buyout, from servicing the US market. This exclusion period expired in 2017, which allowed management to begin to respond positively to the many enquiries received from the region. The team also realised that the US was a fragmented market which could be well serviced by a CTI subsidiary and, later in 2017, opened a location in Houston to form CTI US. In its first year of operation the subsidiary delivered contribution in excess of £500,000 and has gone on to win a major framework agreement with a large US refinery group. No decision to exit the business has yet been made, but if the growth in the US continues as forecast in 2020, then the group will have become a significantly more valuable asset.
As these real-life examples demonstrate, the rewards of overseas expansion can be significant. Whichever route is taken, if the strategy is sound and process is executed well, the outcome for a business is likely to be far more positive than had it decided to remain trading solely in the UK market.
If you’d like to find out more about how we help our portfolio companies to deliver on their export or expansion strategy, please contact firstname.lastname@example.org