During the latest downturn in the oil and gas industry, business risks have become highly visible. When a company has a concentration of business with a small number of customers or earns most of its revenue from a few products, the consequences can be amplified when the market suddenly changes. There is value in customer and product diversification. Similarly, there is value in geographic diversification. Often, not all markets react or change at the same time. Earning revenue in more than one country or region can help to reduce business risk when markets change.
Many smaller companies are satisfied working in a single geographical market. They know their customers and understand their challenges, and they know how to do business in that market. Often such companies do not see compelling reasons to take on additional risks to operate in an international market. The pursuit of international business is often seen as an environment arena for large companies who that have the resources to understand the intricacies of working in multiple countries.
There are many details related to conducting business in a foreign country that require some outside consultation or advice. Tax treatment, importation, legal structure, and employment practices and laws are all areas that require expertise to avoid creating unnecessary costs for a company. In order to receive relevant advice, a company has to provide good information to the advisor, or at least know the questions to ask.
Often a good initial step for a small company is to employ individuals that have prior experience in international business. They will have knowledge and know-how that will help the company to either ask the right questions or interpret the professional advice. If a small company is interested in pursuing work in more than one country or region, it is best to develop a comprehensive strategy rather than addressing the requirements of each entry one at a time.
It may be practical to establish a branch or another form of entity in some foreign countries. Other countries may require a company to have a local partner. It may be possible to conduct all sales outside of a foreign country and rely on customers to manage product use within their countries.
A common approach for smaller companies is to establish a relationship with a distributor, an agent or a representative in the foreign country. Such relationships can leverage the infrastructure and experience of another party in the foreign country so the small company does not have to establish its own infrastructure. However, the selection of a distributor or agent for one’s business is often key to the success of this approach. Trusted references or referrals are valuable, and conducting due diligence on the distributor or agent is critical to avoid future compliance issues. Ethics and transparent business practices are extremely important when evaluating a future business relationship in a foreign country.
Additionally, a key factor for success in a foreign country is understanding the local culture and the way business is conducted. In some countries business can be very formal, while in other countries people may conduct business primarily through relationships and working with those they trust. Becoming a trusted partner can take time, or may require employing someone who already has the trusted relationship established.
The benefits for a small company are compelling if it can be successful in creating an international footprint. Expanding the customer base, establishing sales that are not within a limited business cycle, and creating case histories for the company’s products or services in new environments are examples of how this can increase a company’s value. Pursuing international business is not for every small company. However, small companies that are successful in establishing an international presence may be able to better withstand shifts in the marketplace, and may very well increase their value when compared to similar businesses that only operate in a single geography.