Foreigners travel to the Philippines for vacation and some of them get the idea to set up a business there so that they can live in a cheap, friendly, tropical paradise year-round. When you look at the economy’s growth potential, this seems like a great idea. The Philippines economy is expected to be one of the fastest growing in the world. The Philippines has an abundance of inexpensive labor due to a population of over 100 million, much of which is young. The country continues to try to reduce corruption, a problem that has plagued foreign investment and economic success in the past. The country recently had its credit rating increased as well, which is a sign that foreign investment will be increasing in this country. So, why not set up a business on one of its 7,000 tropical islands and live the dream?
While investing in the Philippines may be a great long-term move for well-diversified institutional and retail investors, those who are thinking of investing a significant piece of their savings in a business here should proceed with extreme caution. For most people who are considering relocating to the Philippines, the best advice may be to invest in a well-diversified portfolio, go ahead and move here if your income is sufficient, and avoid setting up a business here. Stories abound of foreigners coming here and losing a large chunk of their savings of even their lives. The Philippines can be a very dangerous and risky place to do business. It’s a bit like the Wild West in America. However, for those who have the risk appetite, have enough capital to open a business and still survive if everything is lost, and have the appropriate business experience, it can be “More Fun in the Philippines.”
If you believe this is you and you still want to open that business and live the dream, here are 5 recommendations to help lower the risk of your business investment.
1. Keep Your Friends Close and Your Business Partners Closer: As a practical matter, subject to local counsel’s input, it is highly recommended that you set up a corporation as opposed to a sole proprietorship or partnership. This will primarily serve to lower your individual risk and protect your assets outside of the corporation. Even though this is not a partnership, many corporations in the Philippines may require a Filipino investor, and a majority of Filipino board members. In many cases, foreigners are not allowed to own over 50% of a corporation, which effectively means you are not in control. In these cases it is extremely important to do your due diligence on your partners. Have they done business successfully with other foreign investors? Are they well-diversified? Rushing to open your corporation by finding Filipino partners that have not been well-vetted is a perfect opportunity to kiss your money goodbye if you’ve chosen incorrectly.
2. Set up an Operating Agreement with Your Fellow Owners: Have an experienced attorney set up an operating agreement for your business. Among other things this will serve to reduce your chances of being sued if something goes wrong. In addition, talk to your attorney about having an arbitrage clause in your operating agreement. If you have some dispute with the other investors, it can take years to settle these disputes in the Filipino legal system. With an arbitrage clause you’ll be able to get a legally binding outcome much, much faster if a problem does occur.
3. Monitor Your Cash Flow Early and Often: As my former teacher Steven Kaplan at the University of Chicago Booth School of Business taught me: Cash Is More Important Than Your Mother. If you don’t have cash you won’t have a business, but you’ll still have your mother. In addition, because corruption has been a problem for many business owners here, you have to monitor the cash flow and analyze it. If you don’t know how to do this, you should hire an analyst who does. They will be able to spot any potential abnormalities which you can then address before it turns into a majority disaster for your investment. In addition, a good analyst can provide additional recommendations on how to increase the profitability of your business.
4. Setup A Computer Database to Track Your Business Activity: A lot of the business activity in the Philippines is recorded on paper. Although, some of this may be necessary, it is recommended that you enter the information directly into a computer where possible and hire someone to do the data-entry to get it into the system for all other cases. Having all of your business activity in a database is essential for the analyst monitoring your company. With a properly configured database, you will be able to monitor your company’s cash flow and increase its profitability much easier. The idea is to get the data, analyze it, make changes to improve profitability, get the new data, analyze it, etc. This will allow you to monitor and continuously improve your business.
5. Don’t Cut Corners: Some people may be tempted to follow some of the corruption they see around them by doing things such as paying bribes, not paying all of your taxes, or not following other regulations. Doing business in the Philippines is not going to be easy. But if you have the right experience, business plan, strategy, patience and dedication, you can have a viable long-term, profitable and fun company. If you feel you have to cut corners to make it, you either don’t have the patience or the right business plan to succeed in the long-term. In that case you are better off not opening the business.
Brian Sullivan is an Assistant Professor of Finance at Hallym University in South Korea where he teaches classes in Financial Management, Risk Management and Management Strategy. He has over 15 years of real world experience analyzing companies. He is a graduate of both the University of Chicago Booth School of Business and the University of California at Berkeley. His wife is from the Philippines.
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