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Manage business risks when expanding abroad: entity health checks and due diligence

By Craig Dempsey and I am the CEO of Founder of the Biz Latin Hub Group 

Expanding abroad is a big step for any company, from small- to medium-sized enterprises to international groups.

Many opportunities await businesses who make the bold move to step into a new market. The challenge, for those who have done their homework and are aware of the risks involved, can be rewarding.

It is vital to assess your market entry strategy carefully, but managing risk does not stop there. Companies must regularly assess their compliance with local corporate regulations and undertake due diligence to ensure their next moves will be positive for business growth.

We outline key elements to manage business risk abroad: conducting entity health checks and ensuring due diligence in business operations.

What is an entity health check?

An entity health check is a review conducted by auditors external to the company to assess its ‘health’ or status in the eyes of the government. These reviews may also be known as ‘corporate health check’ or ‘corporate compliance check.’

Entity health checks, which are usually focus on the legal and financial conditions of the company, with assess compliance with:

  • registry filings
  • minutes of meetings and statutory registers
  • licensing agreements
  • employment records
  • company finances
  • taxes and social security contributions.

The auditor will then provide a report to business owners that outlines their overall compliance with local regulations. Auditors may outline discrepancies in the information available to them, outstanding requirements or non-compliance issues.

Why get an entity health check?

Entity health checks give the business owner forewarning of any compliance-related issues that could result in sanctions from the government. Experienced auditors may also be able to provide advice on potential savings for a business.

By undertaking an entity health check – usually before the end of the financial year when due dates for filing information arise – business owners are informed and empowered to remedy any potential issues with their company’s regulatory obligations, avoiding penalties or delays to operations imposed by the government.

Manage business risk by taking preventative action and understanding how your compliant your company is with local corporate regulations. This is especially helpful for business owners who aren’t familiar with the regulatory context of the new market they have entered.

Partner with trusted corporate secretarial services providers

To ensure you get the greatest degree of assurance from your auditor, partner with experienced and trusted corporate secretarial service providers operating within the country you have expanded to. They are the best source of knowledge and guidance for operating in compliance with unfamiliar local regulations.

Their support will enable new market entrants to safely navigate the business environment and support successful long-term commercial activities.

Ensuring due diligence to manage risk

When operating in a new environment, executives and entrepreneurs must take precautions to ensure they protect the integrity of their business. This is managing business risk by ensuring due diligence in their everyday commercial activities.

Due diligence can be considered an umbrella term for many different activities. 5 key elements of due diligence include: legal, financial, background checks, business intelligence, protecting intellectual property, and public registry searches.

Predominantly, due diligence involves collecting information to understand and assess risk within a company. This protects the company from legal and other issues, and allows its owner to make informed decisions.

  1. Legal due diligence

Legal due diligence often primarily relates to company acquisition, and is considered an essential aspect of the mergers and acquisitions process. An executive or investor looking to acquire an existing business may not necessarily be fully aware of that business’ ‘compliance picture,’ or any other potential legal risks.

Understanding the compliance status and other conditions of the business through comprehensive due diligence informs the potential buyer of any risks they may be taking on in the process of acquiring the business.

  1. Financial due diligence

Financial due diligence involves scrutinizing tax payments, projected cash flow, transactions and projections, and reviewing and auditing financial statements.

Ultimately, this due diligence builds a picture of the company’s future performance.

  1. Background checks

Companies should conduct thorough background checks on potential employees – especially those at senior and executive levels – as part of their due diligence strategy.

Background checks can be made up of a number of different elements, and the company should set the criteria of the check based on their needs for the role. Background check criteria could be based on:

  • the seniority of the position
  • specialist credentials or qualifications required for the role
  • sensitivity of the information the individual may need to handle in the role.

If a company is hiring for a position that deals with sensitive company information, background checks are a must. Background checks can comprise of a review of:

  • education and other qualifications or credentials
  • previous employment as shown on the person’s resume
  • criminal record history
  • credit history
  • vehicle and license records.

Make informed decisions about your next hire with thorough background check due diligence.

Company policies should reflect their process for conducting background checks in order to appropriately inform current or prospective employees.

  1. Business intelligence

Business intelligence is a crucial part of due diligence, as it enables executives to make better decisions about the direction and goals of the company using data.

Business intelligence looks different for different companies and industries, and there are many tools companies can use to pull the most insightful data together to support their decision-making.

Often, companies will use a number of applications and other technologies to collect, integrate, and analyze information. The model of practice of their information gathering should fit with their business needs. Smaller or medium-sized companies may choose to engage with third parties to undertake business intelligence practices on their behalf, as this activity can sometimes require large expenses in order to invest in data-gathering technologies.

This kind of due diligence requires careful planning, gathering and presentation of business information to understand where the business is succeeding, failing, and where there is room for improvement.

  1. Intellectual property protection

It is imperative for businesses to obtain intellectual property (IP) protection as soon as they can. This can come in the form of trademarks, copyrights, patents, and the registration of their commercial name.

All companies have a brand that represents their essence and that builds credibility with customers through its story. Though trademark and other IP registration is not mandatory when expanding to a new market, it is very important for protecting the development of the brand.

Obtaining formal IP protection ensures exclusive legal right to the commercial use of distinctive signs, slogans, inventions, business models, and other unique elements of a company. Failure to obtain IP protection for those crucial elements creates significant and unnecessary reputational risk for a company, as those elements are therefore free for third parties to use for their own commercial gain. This dilutes your brand development and credibility, and can confuse consumers who eventually may lose trust in your products and/or services.

Trademark, patent and other registration requires businesses to first be aware of existing IP protections registered by other companies. This research is crucial to understanding that your own ideas, inventions and designs are unique.

Many countries administer these protections through a centralized intellectual or industrial property institution. The process often involves publishing your pending application in the media or an official gazette to give third parties the right to submit comments or objections.

Finally, obtaining a trademark, patent or other kind of IP protection also requires regular management. As an owner of registered intellectual property, it is in your best interest to continue researching new pending applications in order to ensure no third parties are registering similar concepts, designs, inventions or models to yours.

IP protection is a key part of due diligence activity as it protects the reputation, credibility, and profitability of a business.

What other risk management measures can businesses take when expanding?

Due diligence is a broad area and managing business risk can require additional action outside of the 5 elements mentioned above. For example, business expanding into new markets could consider hiring their staff abroad through a Professional Employer Organization (PEO). A PEO can support companies with the hiring and management of staff in another country. They will also ensure the company complies with all local labor regulations. They achieve this through what is called a ‘co-employment model,’ acting as the Employer of Record for a staff member in the eyes of the local government.

Consider your needs as a business, and what your potential weak points may be. If necessary, engage with an experienced third-party provider or consultant who can ensure your company’s risk management strategy is robust and sustainable for a long-term expansion.