After years of watching expats struggle with new business ventures, or accept low paying jobs just for the privilege of “living in paradise”, I recommend people carefully consider these common pitfalls before investing time and money in an overseas venture.
In a minute, I’ll point out the eight most common pitfalls you are likely to face as an expat starting or buying a business overseas, but first, here is a case example of a business that went very wrong…
True Story: A U.S. businessman (we’ll call him Joe to protect his identity) moved to Panama and started out with the best intentions and plenty of capital (see common mistake #2 below). Even though Joe had never built homes in his life (see common mistake #6), he felt the existing contractors weren’t building to U.S. standards, weren’t building fast enough, and weren’t paying their workers enough. Joe’s solution was to start his own construction company, catering to foreign buyers.
Since Joe spoke only a few words and phrases in Spanish (common mistake #1), he hired English speaking purchasing managers, architects, and attorneys to help him run his business. He increased his employee’s wages, added employer benefits not normally offered to employees in Panama, changed the “typical” construction style to one that matched the wishes of his foreign clientele, and ordered huge volumes of high end custom home construction materials from Miami (see common mistake #5).
Sales were brisk, because the market demand was very high, but finished homes didn’t materialize. Permits were taking too long to obtain (common mistake #4), and cost overruns were surprisingly high, due to a combination of insufficient or incorrect materials, and under skilled laborers who were not familiar with modern construction techniques.
After several months of focusing on sales without tracking exactly what was happening on the construction sites, Joe eventually discovered his workers had stolen many of the imported construction materials. He also discovered that some of the locally produced materials he ordered and paid for had never arrived in the first place.
When Joe tried to fire the culprits, his workers conspired against him by reporting him to the labor department, pointing to an archaic clause in the labor code designed to protect employees. Even though Joe’s business was designed to benefit the workers with higher pay and better benefits, he left Panama with about $1 Million less than he started with, and three unfinished houses which he had serious trouble selling after the market turned sour.
As the story above demonstrates, there are a number of things that can go wrong with your overseas venture. Here are eight common mistakes made by expats starting or buying a business overseas.
1. You don’t speak the local language of your new country
I’ve always been amazed at the number of people who can barely speak a sentence in the local language, yet believe they are capable of running a business in their newly adopted foreign country. Most times, this is because their friends and the people they know in this country all speak English, which lends them a false sense of comfort. While it is natural to gravitate toward English speakers in any foreign country, relying on them for your business to move forward is a big mistake. If you don’t have what it takes to learn the language of the country where you intend to operate, chances are you don’t have what it takes to succeed in a business in that country either.
2. You have plenty of capital, so you intend to purchase an existing business or buy your way through any challenges that may arise while starting your new business
Deep pockets will either be your best friend or your worst enemy in your new overseas endeavor. The people I know who lost the most money with business and investing overseas were – you guessed it – people that started out with lots of money to invest. In fact, I am quite thankful I had hardly any money when I started my first overseas business because if I had, I would have lost most of it. Now, if you have really deep pockets, you can probably ride out most of the challenges you will face, but you should factor substantial cost overruns, time delays, and unforeseen expenses into your business plan and your return on investment calculations. When I say “cost overrun”, I am not suggesting something might cost 20% more than your best estimate, I mean something can cost 300% – 400% more than your best estimate – plan accordingly? The fact that you cannot make a reasonable estimate is what creates the uncertainty and increases your risk.
3. You are counting on the low cost of labor for your business to work
While most of the developing world works for paltry wages, foreign business people often start businesses in an effort to exploit cheap labor. By “exploit”, I am not referring to setting up sweat shops or any illegal practices (although, obviously, this does happen), I am simply referring to the idea that a business will be more profitable in a foreign country because labor is cheap. From my experience, you get what you pay for. Not only are laborers typically unskilled and not capable of the same levels of productivity as you are accustomed to at home, but there are usually hidden costs to hiring labor overseas. These hidden costs come in the form of social security payments, sick pay, severance pay, or worse, threats from your angry employee that his cousin in the permits department will yank your permit if he loses his job at your company.
4. Your business requires approvals, permits or licenses.
What would normally be a simple procedure back home can easily become a deal breaker in your newly adopted country. Too many times, I’ve seen newbies assume they will get the approvals and permits they need to start their business, only to see them still waiting, a year or even several years later. Many businesses are off limits to foreigners, others arouse unfriendly glances from the competition, who promptly invite their government friends over for lunch to ensure your permits never materialize (see common mistake #7).
5. Everyone is doing it wrong in your newly adopted country, so you will show the locals how to do this business the “right way”
There is usually a reason why the locals are doing it “wrong” and a reason why their way IS actually the “right way” once you factor in the local customs, culture, regulations and other nuances. You should realize how narrow your vantage point is as a foreigner, and how unlikely it is that your idea will work “better” even if it makes obvious “logical sense”. People resist change no matter where you go, so “hoping” your business will change the way things are done is like the Israelis telling Palestinians to change their ways – good luck with that. Real change, if it ever happens at all, happens over years and decades, not weeks and months, and chances are your business will fail before anything or anyone “changes” to your way.
6. You have no experience or past success with your business idea
I’ve seen too many people arrive in a foreign country with intentions to start a new business in an area where they have no experience. Home builders move overseas to become bartenders, bartenders move overseas to become property developers, and property developers move overseas to start call centers. “Stick to your knitting” comes to mind here – doing what you already know how to do comes with enough challenges, when starting off in a foreign country try to avoid entering an industry or business sector you know nothing about.
7. There are large, locally owned, direct competitors in your chosen field
As an expat, you are an outsider. Your competitors are not going to be pleased about your new business, especially if you somehow defy the odds and succeed in doing something better, cheaper, smarter, or faster than they can. But don’t expect them to fight fair and improve their own businesses to compete with you. The more likely outcome is they’ll fight dirty, pull strings, talk to their connections, and find a way to stall you or shut you down one way or the other.
8. You are accustomed to doing everything by the book
You should probably throw the book out the window, because most small to medium sized overseas businesses are only successful because they cut corners, operate in a grey area, bribe officials, and generally swing the odds in their favor through deep personal connections. In most developing countries,” the book” is hardly enforceable, and can be interpreted in a variety of ways. In most situations your desire to comply with precise regulatory requirements and bureaucratic processes will almost guarantee delays, and higher expenses.
A wise and seasoned expat once told me: “start your business, build your house, do what you need to do, then, if it comes to that, pay the fine. Usually the issue will either be ignored or forgotten, and if there is a fine, paying it is probably the easiest, cheapest, and fastest way to comply”. While I am not advising that you break the law in an effort to start your new business, I do advise that you consider creative pathways to progress that are probably not written in “the book”.
If any of the above statements ring true for you, you should rethink your approach to making money overseas. It can be done, but there are really only a few business models I know of that work exceptionally well. Stay tuned for a future article where I’ll describe successful overseas business and employment strategies.
By Michael Manville
Editor’s Note: Learn Michael’s winning overseas business strategies hands-on in his upcoming training course: Business In A Briefcase – How To Create Fortune And Freedom With A Business That Travels With You. In this interactive, personalized home study training course, Michael shows you business strategies that WILL work overseas, that CAN provide you with the income you need to enjoy life in “paradise”, yet DO NOT require you to take on any of the risks inherent with most overseas businesses. Enrollment in Business In A Briefcase is regularly $399, but Escape Artist readers can save $150 by enrolling from this link and pay just $249.