Introducing International Structures
We have put together a series of articles to give South African businesses a real sense of the process, and implications, of setting up offshore structures. There is a lot for business founders to get their heads around, and there is only so much time our clients can spend (and pay for!) in consultation. So, we ask you to think of this article as a road map, and also as a way to get more from your legal and tax advisors if you go down that road! Ready?
Taking your business offshore: Do you REALLY want to go offshore?
At our firm we are asked, almost daily, to help businesses set up and grow offshore. Indeed, we have a dedicated team providing a turn key solution to that (tax, IP, law, exchange control, transfer pricing). And we can see why demand for this advice has surged: the decision to grow your business offshore is merely diversification wisdom. In a world that is more accessible than ever, why would you invest everything you have in one country? Surely you would rather spread your investments around, allocating an appropriate percentage to North America, Europe, Asia, other emerging markets, etc.
In the vast majority off cases, the real reason why our clients hope to build their business offshore is to improve the future prospects of attracting investment, or selling the business. There are, admittedly, reasons why a future buyer or investor would take a dim view of a company entirely based in South Africa – if you don’t believe us, just try and get foreign seed investment past SARB. Don’t even contemplate trying to get your IP offshore (much more on that later in this series). In fact, we haven’t even started talking about our country’s “emerging market risks” (currency fluctuations, expropriation scare mongers, social unrest, crime – this list is all too easy to extend if you were to be faint hearted about it). So, we can see how a future Mark Zukerberg suddenly pauses his coding when the thought pops into his mind: do I really want to build this in South Africa?
Having said that, successful business people are not thin skinned about risks. Two of our largest, most successful client exists did not have a silver bullet international structure: WooThemes (who sold to WordPress for something over USD30mln), and Getsmarter (who sold to 2U for well over USD100mln.) Interestingly, both of these clients did have another very important offshore element: the lion’s share of their actual and potential revenue came from offshore customers. In fact, surely that was the key driver to their value – and this is also surely the key driver to that relentless value discussion you will have as a start up business: how big is your market, and why are you well placed to tap into it?
What those two clients did so successfully, was to focus on developing and selling their product, rather than on an intricate international group structure. They knew that at their early stages, they had many demands on limited growth capital. And more importantly, they chose to focus their time and mental energy on value creation. If they had spent either their cash or their time on international structuring, there would have been an inevitable opportunity-cost in terms of slower value creation. Even worse, the opportunity cost could have been terminal to their businesses if they used up capital that could not be replenished, leaving them empty handed when it came to investing in product development.
But, an offshore structure can provide you with material, potential advantages. We describe some of these below, and we ask you to keep them fresh in your mind when you compare these benefits to the cost of setting up the structure as you read through this series of articles. The legal and tax hurdles described in the remaining articles are going to become daunting – so your “why” must strong. Here are the “why”s which might apply to you:
· Your investor requires it: after months of beauty pagents, you finally land an amazing investor. The investor has funds (obviously) but can also provide the more important investment of experience, connections and active guidance. However, they are based in (Silicone Valley/London/or similar) and need you to be offshore because they can’t disburse investment funds to you otherwise. Okay! But make sure they understand the cost, and that a chunk of their investment will need to be spent on setting up that structure.
· Your future buyer may require it: here, we are assuming that your company’s future buyer is going to want the essentially value of the company to be based offshore. In the start up/tech world, that essential value is likely to be the software IP developed by your team of techy geniuses – and this means that the IP needs to be based offshore.
· Your market is offshore: As a South African resident, you and your company need to repatriate all foreign currency earned from offshore clients within 30 days. But, if your revenue comes from offshore, why bring it all into the South African exchange control web. You could potentially achieve much more currency flexibility by billing and receiving revenue into your offshore company’s bank account, which is not subject to exchange controls. (Pages and pages of qualifications to this statement will follow, but the essential outcome is the goal).
· You plan on emigrating, or you want your kids to have the chance to live/work/be educated offshore: in that case, it would be great to have a foreign business up and running, earning you hard currency for living in the so-called first world.
So – one or more of these reasons resonates with you and so you decide to commit to building an international structure. What does it entail? Well, that depends on whether you want to genuinely create offshore value, or if you just want to create the impression of being offshore, in an attempt to get the advantages of lower tax, offshoring your IP and revenue so that you escape exchange controls. If you are the latter, we aren’t not judging you, but you’re going to need much cleverer lawyers than us…
Okay, just hang on. Before you jump into the next instalment of this series of articles, we need explain who our actual and potential clients are. This article is aimed at businesses who really want to create a business with genuine foundations. Something built over time, based on sacrifice and sound principles. That mission will require commitment, funds and a willingness to travel to - and set up business in- an offshore jurisdiction. If that is not you, this article is not for you, with all due respect. When it comes to your international business structure, our service to you is to demonstrate bullet proof value to your shareholders, investors and/or buyers. If a future buyer is willing to spend USDX00mln on your business, they will be bringing along lots of lawyers who will be salivating at the prospect of finding that you cut a corner – giving them all the reason they need to discount your company’s value by a nice haircut.