The pandemic has shown that Polish entrepreneurs are increasingly open to expanding their activities abroad. They primarily focus on mobilisation and taking on new challenges, such as business expansion into foreign markets. We have seen an increase in the number of projects aimed at scaling up businesses. In this article, we will outline what such a process looks like and explain why it is a substantial logistical challenge.
Entering the international market
Polish entrepreneurs are welcome in many countries, not only in Europe, especially when they are supported by innovative technologies or high-quality specialised services. However, this does not mean that expansion into other markets is straightforward. We will ignore the competition aspect of it here, because it is present everywhere (in a smaller or larger capacity). This is about the logistics of the expansion process.
It is necessary to accurately analyse where each function/part of the business should be located, so that ultimately the flow and structure of the business are transparent and understandable to the tax authorities in all the relevant countries. It is also necessary to understand where to place each element of the business, to distribute and assign tasks as efficiently as possible in their respective countries. Finally, it is essential to identify and address business risks.
Naturally, expanding a business on an international scale opens up unlimited possibilities, but it is undoubtedly also a considerable logistical challenge. This entire process must first be thoroughly mapped out and managed in Poland in order to enable carrying out business activities in the destination(s) of choice.
Expansion in times of dynamic returns
A client of ours, who runs an educational business going through a phase of dynamic growth; made the decision to expand their business and introduce it to the international market, consequently they reached out to us requesting support in their planned expansion. The client’s activity was spread across several different entities (a number of capital and personal companies), which required a thorough rethinking and solid structuring not only from the legal standpoint, but above all from the business side of it.
This company thought about reorganisation well before the outbreak of the pandemic and originally assumed a completely different scenario to the one which was finally put in place. The worldwide state of affairs, including the economy, made it necessary to change their business concept. This fundamental change was primarily due to the draconian restrictions affecting their industry. The ability for the client to transform their business, not only allowed them to adapt it and keep it going, but also lead to its dynamic growth (despite difficult and uncertain conditions!)
Through effective cooperation, we developed a new scenario of operations, adapted to the new market needs. As part of the business plan, we also carried out a reorganisation linked to the changing conditions – we will elaborate on this point further below.
A conceptually well-thought-out reorganisation is key
To begin with, the structure assumed business would be carried out in several companies at the same time, which was justified by the fact that individual projects were placed within separate entities. This is a natural and understandable way of developing a business. However, as projects came to an end, the reason to maintain the multi-entity structure had dropped off. In the long term, this type of configuration would result in resources including financial being spread thin on the ground, which would further hinder the day-to-day management.
To avoid generating unnecessary costs, it was important to consolidate the business all the while bearing in mind its envisaged international development. In this particular case expansion was aimed at the American and the United Arab Emirates markets.
The developed (and then implemented) structure concept was based on the merger of the Client’s companies – all part of the same capital group – with one entity leading the group’s business activity. The entity in question was to take over the assets of all the other companies. Consequently, it was possible to focus and unify the business which was until that point spread over several different entities. This allowed the reduction of administrative and operational costs associated with maintaining an extensive structure.
The optimal solution, both from a legal and business point of view, is a merger based on the principle of universal succession (i.e. acquisition of the subsidiary’s assets by the parent company) whilst simultaneously establishing a partnership. This allowed to improve the further development of the group all the while taking into account the planned expansion. In addition, the merger was completed within the planned timeframe, before unfavourable legal changes – from the point of view of the group companies – came into force. All of this made it possible to maximise the benefits of consolidation and the resulting synergy effect.
But that was just the beginning!
Added value from restructuring
The restructuring for future expansion was conceived in such a way as the ensure that the company that acquired the other entities as part of the merger, became a shared services centre, with a qualified team of among others IT specialists, accountants, as well as a marketing department responsible for the implementation of educational projects. In this way a service provision was provided for the main business activity in individual jurisdictions.
The main activity, in which the know-how (i.e. the essence of business) and sales activities are located, is carried out through partnerships that are established individually in specific markets. In Poland, for example, it is a general partnership, in the USA an LLC (Limited Liability Company), and in the United Arab Emirates – a limited company.
The development of the business is based on the creation, in individual jurisdictions, of equivalent companies (beneficial from the client’s business perspective) in relation to the business established in Poland which provides technical support. The entire business – in Poland, Europe, the United States and Asia – will be coordinated using a Technical Entity located in Poland which will provide specialised technical and organisational facilities, using the resources and know-how of the entire team of each of the merged companies.
Due to the development of the brand on a global scale and an expansion aimed at foreign customers, the Technical Entity will provide substantive centres located in selected jurisdictions with the facilities necessary to conduct business activities and reach customers. It will provide assets and services consisting of accounting and legal services, sales support, creating and operating databases or providing appropriate computer software.
A bespoke investment vehicle
As part of the above-described restructuring, the business and investment activities were also uncoupled. A new separate vehicle was created to conduct investment activities. This vehicle is independent of the core Business of the Group and thus allows the owner to separate these two types of activities, which is important for accounting and organisational reasons, but above all it allows to adequately secure and separate personal assets from the business.
How to prepare a business for international expansion – summary
The outcomes of the strategy led restructuring carried out on our client’s business were:
- Significant reduction of the Group’s operating costs;
- Reorganisation and refocus of resources, which led to an increase in their potential;
- Simplifying the group’s management structure;
- Transparent structure for international expansion (clear structure, transparent flows within the Group);
- Security and independence of personal assets from business activities achieved by uncoupling investment activities from the core business.
Above all, when putting in place and implementing a restructuring process for international expansion, it is important to recognise the strategic goals of entrepreneurs. Lawyers and tax advisors cannot look only at the status quo, i.e. focus on the here and now. The most important thing is perspective. A good understanding of the business and exchanging information about plans is the basis for a successful process of reorganisation.
It is also important to obtain information from the relevant jurisdictions, a thorough analysis of legal, tax and industry requirements and the ability to introduce the most effective solutions using discounts/rebates or other privileges available in individual countries. Experience and relationships with local partners, who play a key role in the implementation of the planned structure, are also important. Instead of being the proverbial wind in the sails for entrepreneurs, insufficiently thought-out business organisation can kill even the best products and services with the expansion ending in failure.
We have prepared a series of articles highlighting the most popular expansion destinations. Here they are for your perusal:
Expanding next door – the Czech Republic, Slovakia, Germany, Romania
Taxes in Estonia, Italy, the United Kingdom, Malta and Cyprus
Business expansion outside the EU – let’s have a look at other continents