8. Evaluate possible business structures

How you decide to structure your business will depend on whether you are simply aiming to export your product or establish a more permanent presence. It will also depend on your market of choice and what methods for setting up a business are available.

Every market is unique, therefore it is important that you seek professional advice before making a decision. It is crucial that you understand how the business entity and structure you choose will affect your legal risk and tax obligations, as well as strategic objectives. Certain obligations may also need to be met as specified in the terms and conditions of funding received from your investors.  

Possible business structures include:

Joint ventures

A joint venture is a contractual business undertaking between two or more independent parties. It is typically based on a single business transaction and can be a good way to penetrate international markets while reducing risk. Joint ventures are a great way to share strengths and in doing so increase the competitive advantage of each party in market.

There is always the possibility of conflict occurring between parties of a joint venture. To minimise the likelihood of this occurring, it is important that you have a contract or agreement written up that specifies rights, responsibilities and goals.

Strategic alliances

A strategic alliance is an agreement between two or more parties to pursue a set of agreed-upon objectives while remaining independent organisations. An alliance can help to achieve long-term win-win benefits and innovation based on mutually desired outcomes, and is a great way to share costs and utilise member strengths when entering a new market.

An alliance can be formed between a company and its suppliers, customers or even its competitors in certain circumstances, for short, medium or long periods, depending on the goals.

Like a joint venture, there’s always the possibility of conflict occurring between parties, as well as the creation of a future local or international competitor. For this reason, it is important that you have a contract or agreement in place that specifies the details of your arrangement.

Wholly owned subsidiaries

A wholly owned subsidiary is a company that is completely owned and controlled by a single parent company.

Setting up your overseas business as a wholly owned subsidiary allows you to have complete control over your day-to-day operations in market. In some countries, like India, Indonesia and China, licensing regulations make the formation of new companies difficult. If a parent company acquires a subsidiary that already has the necessary operational permits, it can begin conducting business sooner and with less administrative difficulty.

Choosing to establish a subsidiary in market signals that your company has a long-term commitment to your overseas market of choice.

Branch office

A branch office is considered the more simple business structuring route as it operates as an overseas trading base extension for the company which is incorporated in Australia.

A branch is legally conjoined to its parent company. This means it is subject to the laws governing foreign businesses, as opposed to those governing national businesses. In comparison, a subsidiary is an autonomous, separately incorporated entity that shares assets and IP with its parent company.

In general, a branch is considered cost efficient and a great way to gain a better understanding of your overseas market before investing heavily.

Case study

“I think the subsidiary works well for us and the reason it does is that it lets us maintain a constancy of culture. We value and treasure our roots in Australia. It is part of who we are as a company.”
Carl Nerup, CMO and Co-Founder

Carl Nerup, one of four co-founders at Sydney headquartered IoT security startup, COG Systems, always knew the company would become international: “The company started in 2014, originally doing a lot of integrated service work out of Canberra on behalf of the Australian Government. After about two years we said to ourselves, we’ve actually developed a lot of institutional knowledge about the solutions that people are looking for… why don’t we try and commercialise this and go forward to the broader market.”

With an even split of Australian and US citizens among Cog’s co-founders, Nerup suggests the US market was the natural progression. “Once we were doing business with the Australian Government we knew we could go do business with the US Government, where they have a bigger bucket. We had the ability to organically grow based on the split between our founders being based in the US and Sydney. It was this baseline of federal business that positioned us so well for a launch into the commercial markets,” explains Nerup.

Cog System’s mission is all about securing IoT. “If I was to liken what we do in a short sentence, what VMware is to cloud computing, Cog is to IoT. We take a foundational approach and work up to really help see the world in more of a modular rather than a monolithic way,” states Nerup. The startup’s international expansion resulted in the company establishing a wholly owned subsidiary and incorporated office in the US explains Nerup, “I think the subsidiary works well for us and the reason it does is that it lets us maintain a constancy of culture. We value and treasure our roots in Australia. It is part of who we are as a company. This has allowed us to successfully extend into the commercial market and where we have some US federal opportunities, we have been able to mitigate any potential concerns because of the closeness in the relationship between the US and Australia.”

When assessing their options, Nerup was somewhat skeptical of pursuing a joint venture in the US. “Joint ventures can be great, however, the only people keen to do a three-way joint venture are people who have never done them before," he said with a laugh. "They are extremely complicated and they don’t succeed very often.”

When assessing the type of structure you’d like to establish in a market like the US, Nerup warns that there are many factors that you need to consider. “When you enter the US there are some things that you definitely need to take into account, for example, with the current strength of the US economy, benefits will be required. Take health care as an example. The US has a very different system from Australia, however, health care in the US is very expensive and you will have to factor that in.”

Nerup suggests that when things appear to present a barrier, they can also sometimes afford greater opportunity. “There is the exchange rate, but you can’t let this be a barrier because exchange rates change. The US dollar is strong today, it makes it disadvantageous right now to be an Australian company paying employees in US dollars but in our case, we have used our position as an Australian company with an office in the US, to bill in US dollars. So we’ve really been able to leverage our international position, so always look at both sides of the coin.”

Reflecting upon his experience as a co-founder of an Australian startup that has successfully grown globally, Nerup suggests, “My advice would be, do not bite off Asia and the US at the same time. Nor, should you think of Asia as one market because it’s not,” he continues. “If I could have one do over, I probably would have held out and taken some US venture money along with the Australian money. I think that would have helped our company. If you’re seeking a seed or A round, try to balance the fundraising across the markets that you have prioritised. It’s just that things are different, it’s not bad it’s just different. We both value and appreciate that diversity, because that makes us a better company.”