Even at its earliest stage, a company and its shareholders will be considering the best way to grow business, expand into different geographies and product lines and eventually, exit. Geography will be a significant consideration, with many UK companies weighing up—as musicians and actors have done for decades—whether long-term success depends on “cracking America”. Whether transatlantic expansion happens organically or through M&A, leadership teams should carefully review the options available to make sure they plot the right course.
Simon Arlington, Corporate Partner, at Morrison & Forester provides some pointers
The appeal of the US
US expansions can be difficult for UK-based businesses and more businesses are waiting until they are firmly established before attempting to expand into the US. However, the appeal can make the effort worthwhile. Expanding into the US opens up a huge interconnected market which can allow the business to grow rapidly once it gets a foothold in the country. The huge audience, in combination with the spending power present in key hubs such as New York or San Francisco, can make it an ideal next step for an ambitious business leader.
The language and cultural synergies between the UK and the US also make it far easier on resources. Companies don’t need to overhaul their materials to suit a new language or cultural mind-set, but can just amend their content to suit the specific needs of where they will be setting up. For business leaders wanting to take a step back from day-to-day operations, this can be a huge reassurance.
In contrast, the EU can often present a more challenging proposition for UK businesses on the international expansion trail, particularly in the wake of Brexit. For some, the decision will be easy, and EU expansion will be a natural next step. For others, the decision will not be so clear-cut. While some regulations and laws may be well harmonised between EU member states (and indeed, given the shared recent history, the UK), any business will need to review and adjust its practices for each jurisdiction before entering the market. Many EU countries have both a national legislative framework and their implementation of EU legislation (EU directives which need to be implemented into national laws), together with a body of directly applicable EU regulation, meaning EU expansion can, at times, be an arduous process. Employment legislation, GDPR implementation and environmental laws are just a few areas in which legislation differs among EU member states. Even where legislation is relatively well aligned with the UK, processes for establishing entities, setting up bank accounts and obtaining insurance can be particularly burdensome in those EU countries which require notarised and legalised documents before action can be taken.
There is a resource element to consider as well. For EU expansion, this will likely require investment in staff or advisers who are able to speak multiple local languages and competent in dealing with the different operational requirements in individual jurisdictions. However, growth into and across the US—while geographically more expansive—might only need one management team to help the company grow.
Different regions, different practices
While expansion into the US might be more appealing, there are still challenges to overcome and factors to manage. One key consideration will be around tax and licensing. Many regulations in the US are enforced at the federal level, making considerations around expansion somewhat consistent between states. However, tax and certain licencing requirements will be controlled at the individual state level. While the differences are not impossible to manage, if the company grows across the US, it will need to navigate the small differences for employee and company tax that each location will present, together with the other regulatory requirements.
If the business is planning on an exit, the US can offer welcome relief, with a process that is swift, tried and tested. New York, English or Delaware law is often the most efficient route for your sale documents, with English law generally known for being seller friendly. For sales to EU-based acquirers, there are often many independent antitrust considerations and simply fewer opportunities to sell at the best price. In the US, the size of the market is often the biggest pull factor; there are simply more potential acquirers willing to offer shareholders the best returns on their investment.
What to consider
If the US is part of a long-term growth strategy, business decisions along the way should not unwittingly compromise the plan to expand or exit in this region. For example, having a European or Asian investor that exerts too great an influence over the way the business is governed can potentially make it impossible for the company to expand into the US. If the direction taken makes compliance with US regulations prohibitively challenging—be it because of unsuitable reporting practices, unsuitable governance, or working with third parties and regions that have a conflict with (or are even sanctioned by) the US—the company may find it can never secure buy-in from the US based investors.
The period after any funding round is an ideal time to consider US expansion. Should the US be the next stage in a company’s growth, it will be important to make the business as US-friendly as possible. Board formation will be a factor in that planning. Even if the company has yet to go public, having a well-regarded set of non-executive industry specific directors will be invaluable at the time of fundraising in the US or planning an exit in the market.
In the EU, there is a preference for an advisory board, which offers non-obligatory, strategic advice to the company, and in many cases, a supervisory board, which is nominated by the shareholders to promote their interests. Some countries, including Germany, enshrine preferred board structures in law, making it a vital consideration for any business seeking to expand into an EU market.
For the US, boards with non-executives and a strong management team underneath are usually the form that is taken and fulfils the same purpose as an advisory/supervisory board for a European counterpart. If the company has the US in its sights, mirroring the standard board structure can showcase its value to the market.
Even with this pre-planning, there will be a range of administrative nuances that a US expansion or exit will require a business to be fully aware of. Bringing the necessary professional advisors on board just for the transaction itself can create difficulties by introducing a rush to make corrections and adjustments to the company’s materials. Instead, having these parties on board earlier can ensure consistency and make sure the business is prepared well in advance.
The popularity of the US in a company’s growth or exit strategy is clear. There are many characteristics of a transatlantic move that make them easier and more streamlined than managing geographic expansion in the EU. However, as with any major business decision, being prepared in advance for these changes will make sure the company is able to have a smoother transaction or exit into the market.
