Mitigating Country Risk Through a Business Expansion Strategy

During business conversations with entrepreneurs across Latin America, we have noticed a particular emphasis on income diversification and asset protection strategies to diminish the adverse effects of a potential recession or veiled threats from the authorities that could affect private property in Mexico. Most of these opinions identify the US market to guarantee their capital investments.

It is common for entrepreneurs to consult their board members about income diversification and asset protection strategies; however, it is not common to find advisory on the multicountry asset consolidation strategies, binational fiduciary and shared services schemes needed to start operations in the US.

Even though the US is becoming increasingly attractive as a perfect market to diversify Latin American country risk, one of the biggest challenges is the reduced pool of multinational experienced advisers to guide entrepreneurs through the international expansion process.

Proper Support, Methodology

Several actors can support Latin American entrepreneurs and investors in their goal of internationalization. The first contact is usually an immigration law firm that is specialized in issuing investor visas; however, these firms do not understand business models; in the same way, there are business advisers in the US who are unaware of the cross-cultural matters and the objectives sought by Latin American investors, or Latino business advisers who lack knowledge of US business mechanics and risks. 

For those mentioned above, investors must have support in all stages of internationalization, from the business model definition and tax strategy to the back-office operations and financial reporting to the investor. There must be efficient coordination of all participants in this process, including immigration lawyers, governmental entities, and technical specialists.

Regardless of the path your company takes to establish US operations, it is vital to understand the significant risks and mistakes in the internationalization process. A poorly implemented diversification and asset protection strategy could take focus away from the core business, resulting in financial losses.

Internationalization Roadmap

To demystify the complexity of establishing operations in the US and in order to turn all the concerns of investors into an actionable plan, at Clever BoD, we designed a methodology that clarifies a path to follow. The "Internationalization Roadmap" is applicable either for a startup company or SMEs with a mature governance model:

Through five implementation phases, it is recommended to address all possible scenarios, challenges, and risks:

1. Initial assessment. The preliminary assessment stage allows for identifying the investor's objectives and selecting business options through a customized search based on investor resources and the company profile.
2. Planning. This refers to the necessary activities to identify the financial and market feasibility of the project, as well as the definition of the required legal-migratory aspects to provide legal certainty to investors and companies. In this phase, the assumptions of the business model, the brand, and the expected growth are also identified as well as the mechanisms for business growth and challenges to overcome for a successful operation in the US market. All the necessary financial analyses, projections, budgets, and tax assessments must be carried out at this stage. The budgetary impact and the design of an adequate mechanism for tax management is undoubtedly an activity that cannot be forgotten before moving on to the implementation stage.
3. Implementation. Only once the project is evaluated as viable should the implementation stage of the previously designed plans begin. A wide range of compliance, logistical and operational issues must be addressed. The success of this phase depends entirely on the project manager’s experience in facing multiple challenges, such as market requirements, the US business culture, and regulations.
4. Operation. This refers to the company's start-up, seeking cost efficiency schemes, flexible operating models, and economies of scale are crucial for the financial health of the business model. At this phase, we recommend analyzing outsourcing schemes of shared services for accounting, audit, and IT departments that prioritize the efficient use of Latin American bicultural labor. Operating in the US only with US citizens with high salaries, benefits, and labor risks is a challenge that deserves special attention, so utilizing existing corporate structures in Mexico or Latin America is essential.
5. Governance. It is a common mistake to think of an internationalization process without considering the subsequent control mechanisms. To mitigate this risk at this phase, forums for discussion, analysis, and monitoring of the project's progress and risks are designed and implemented.

When the internationalization project refers to an entrepreneur expanding his business to the US market, it is essential to develop at least one governing body to oversee and guide his support team; on the other hand, if we are talking about SMEs, the communication mechanisms between the new management structure and the existing governing bodies, such as board of directors, shareholder meetings, audits or project committees, is the greatest challenge, without forgetting the importance of modifying the internal audit scope of work to ensure due compliance with policies and procedures in the new geography.

There is no doubt that expanding to the US is a great option; the vast market it represents  — approximately 17.78 times the GDP of Mexico in 2021[1]  — and the economic stability that comes with it are clear incentives we must take advantage of. Doing it with the right due diligence and proper advisory makes it achievable and will undoubtedly strengthen the current situation of any company.

The risk of not doing so can dilute value for a company. Therefore, Shareholders must lead and supervise the project of investment in the US as a diversification and asset protection strategy; only in this way will it be possible to protect their assets from the current country's risk.

[1] https://data.worldbank.org/indicator/NY.GDP.MKTP.CD