5 business expansion cost considerations for CEOs and HR
How much does it cost to expand a business abroad? Exploring five key cost considerations
Global business expansion is an understandable ambition for many business owners. Opening a new office in another country is a huge achievement which can offer a tonne of opportunities — you can travel, create local jobs, and take your business to new and expanding markets.
However, expanding your business overseas is costly, and far more complex than simply incorporating your company and making that first sale or client connection. There are a great many more business expansion costs one must accommodate first. These can include:
- Setting up your overseas business entity
- Hiring overseas staff and the costs of onboarding them
- Finding and renting the right premises
- Costs associated with relocation to your new premises
- Complying with local labour and tax laws
Essentially, it is crucial you perform an expansion cost analysis before deciding to take your business abroad. Yet whilst such a process can be daunting, it need not be prohibitively expensive.
Costing for global expansion is all about planning and managing your budget from the outset. This article explores common business expansion costs, as well as offering tips on how best to minimise your expenses whilst maximising returns.
Start by looking internally
Before concentrating on the external costs your business expansion will necessarily incur, it is helpful to begin with a bit of introspection.
An international expansion offers a prime opportunity to re-evaluate the existing business practices in your company and their financial viability. We so often look outward in business, that we can miss out on technological and material improvements which could be saving us time and money in the here and now.
You may be surprised to find a number of inefficiencies hiding within your company – such as manual invoice processing instead of automated – which should be addressed before costing for global expansion. Having done so, you can approach the costs of global business expansion knowing your current operations are as streamlined and profitable as possible.
Consider your projected turnover
A final consideration to make before costing your global business expansion is what your projected turnover might be as a result of the growth. Whatever industry you’re in, it’s worthwhile making a modest, realistic projection of additional revenue the expansion may create. With this figure established, you can better determine the viability of your expansion costs.
How much does it cost to expand a business?
Business expansion cost #1 – Registering an entity
One of the first things you will need to do, in order to avoid triggering Permanent Establishment (PE), is register your business overseas. The cost of incorporating a business can vary wildly from country to country:
- South Africa: $13
- UK: $16
- Singapore: $238
- USA: $725
- Switzerland: $1,475
- Italy: $4,915
So, depending on where you want to set up, you could be racking up thousands of dollars in fees simply registering your company.
In addition, you must consider compliance costs, tax rates, and ongoing maintenance of the entity. This also varies across the world, so make sure you are aware of the costs in your chosen location before making your move. Otherwise you may find your projected budgets are not realistic once you start establishing your entity.
Business expansion cost #2 – Real estate
With an increase in the prevalence of remote work, and business being conducted online to a greater degree than ever before, you may not need to open an office overseas. But for many businesses — such as customer-facing industries or those who need their workers in one place — opening a physical space is a necessity.
Buying and renting real estate abroad
Business real estate rents are high in desirable Western cities like London, New York, and San Francisco, with the most recent available figures suggesting an average office space cost of $18,267USD per workstation. But east Asian regions like Tokyo, Hong Kong, and Singapore also demand extremely high prices for office and retail space ($18,051USD per workstation on average). You will find much lower real estate prices in countries in the developing world, such as India and Brazil, often while retaining access to large and growing markets.
Considering this factor can help you to work out how to structure your business activities locally – if you are expanding into a country with high real estate costs, do you really need physical locations?
Business expansion cost #3 – Procurement and utilities
Having costed real estate in your target country, the next factors you’ll want to consider are procurement of the equipment and materials necessary to furnish your offices and/or factories, and the cost of utilities.
A worker is only as good as their tools, they say, and so equipment is not an area you want to cut corners on. Instead, it’s worthwhile shopping around for supplies – office supplies such as computers, desks, chairs, phones; or warehouse/factory equipment like heavy machinery and storage units. If you can’t find them for reasonable prices in the country you’re hoping to expand into, you can instead cost them at home and add to this the price of export.
Utilities vary greatly from country to country, and are themselves in flux (especially at time of writing). Depending on the nature of your work, the cost of electricity, gas and petrol/diesel may figure prominently in your decision on what countries are viable for expansion.
As an example, let’s take a look at the electricity rates ($USD per kWh) in a range of countries around the world.
- Germany: $0.918
- Netherlands: $0.559
- UK: $0.453
- France: $0.375
- Singapore: $0.315
- Australia: $0.302
- Switzerland: $0.263
- Japan: $0.237
- Mexico: $0.210
- USA: $0.146
- UAE: $0.110
- China: $0.088
- Russia: $0.082
- Qatar: $0.036
Business expansion cost #4 – Staffing and training
Staffing is another global expansion cost to factor in. You may want to relocate some of your existing employees, in which case you will need to account for costs like immigration visas, accommodation, travel, language training, and potentially higher costs of living.
For example, if you are relocating to a more expensive location, you may need to boost staff salaries so that they are in line with national minimum wage (or, ideally, the local living wage). Salary benchmarking can help you to understand local remuneration norms.
Alternatively, you can hire staff locally. You won’t need to take care of relocation services and costs, but you will need to pay for recruitment and training. The process of recruiting remotely doesn’t need to be more complicated than locally – especially not with online video conferencing – but it may prove costlier. This can depend on the disparity in average wages between your country and theirs, as well as whether you plan to hire a local recruiter or not.
Furthermore, it is prudent to consider the costs of discharging overseas employees. Whilst it’s not something business owners always want to think about, it is important you know the local laws in relation to hiring and firing. In France, for example, severance pay is notoriously expensive, sometimes costing up to 18 months of an employee’s salary — a financial risk which you would do well to factor into your global expansion plan.
Business expansion cost #5 – Tax compliance and employer-employee contributions
The last major business expansion costs we’ll discuss is the cost associated with international tax compliance and additional payroll contributions, which you may have to make in order to comply both with local tax law and labour law.
Corporate income tax differs around the world, with that of the UK being lower than that of the US, for example. As an entity established overseas, you will have to factor into your cost considerations the amount of income tax you’ll have to pay to the local tax authorities in your new territory.
A range of other taxes new to you and your business will likely also apply, such as varying VAT (value added tax) rates around the world.
Furthermore, the contributions employers must make on behalf of their employees vary greatly from region to region. In France, for example, employers may be legally obliged to pay the equivalent of up to 42% of their employee’s salary in employer contributions – which is put toward social security, healthcare, retirement and more. On the other hand, mandatory employer contributions in Latvia go no higher than 23.59%.
Can you expand globally without setting up an entity overseas?
The costs outlined above can make global expansion seem daunting, maybe even unattainable — but it shouldn’t have to be.
By working with an Employer of Record, you can move into global marketplaces without setting up an entity overseas, and still ensure your compliance with local law. That means you can reduce certain expansion fees and risks while focusing your efforts on maximising the efficacy of your global business expansion.
The support of a Global Business Expansion provider can also help you ensure that your budget is spent in the most efficient way possible, with expert advise guiding you on the best entity type for your needs, and equipping you with practical, hands-on services such as local payroll registration, immigration assistance, drafting compliant contracts and in-country employee support.
For help costing your international business expansion, get in touch with Mauve Group today, and find out how we can help you to minimise the cost of your business expansion.
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