Setting Up a Japanese Entity: Making Sure the Timing is Right

Introduction

Creating a Japanese entity may seem like a natural step for global SaaS companies entering the Japanese market. This is true to a certain degree, but there are key considerations to prevent premature actions (creating an entity too early can have serious consequences). To clarify, Japan market entry and setting up a local entity are different. Japan market entry can initially be done without a local entity. Localization and certain go-to-market (GTM) initiatives can all (and should) be done without a local entity. Setting up a local entity is one phase of the overall Japan market entry: Setting up a local entity is a subset of the overall Japan entry initiative.

Need for a Local Entity

There is plenty of GTM that can get done without an entity. Localization, marketing, and certain levels of sales can all get done without an entity. The results of these initiatives will end up being leading indicators that provide additional validation and conviction in setting up a local entity. To minimize the risk of Japan market entry, we recommend experimenting and validating the Japanese market. This will significantly reduce the risk of investment in the Japanese market. It will also give the new Japan team a foundation to work with (there are ways to put together a Japan team without local hires/FTEs). Understanding the traction in the Japan market will also help with the decision-making.

So when is the right phase to expand on the the Japan market entry and why would a company need to set up a local entity?

Hiring

Hiring and building a team is probably the most impactful reason to set up a local entity. Having a local entity and address will help gain the trust of local buyers. Building out a team will help gain the trust even further with local support. An entity and team shows a true commitment to the Japan market.

After the Japanese market has been validated and the decision to commit to Japan has been made, hiring and building a local team is likely a top priority. There are ways to work around a few hires using an EOR or PEO, but if the goal is to build a proper team, setting up an entity will be the best option.

Customer Requirements

The second driver for considering creating a local entity is customer requirements. Some Japanese companies prefer or may have to do business with other local entities. This may be due to preference or compliance. They may even be required to store data locally (these criteria can be met without a local entity). On a more operational side, some companies prefer or have to do business in Japanese Yen or prefer making wire transfers to domestic bank accounts. A lot of the time the level of compliance and checks increases to make purchases outside of Japan. The lack of a local entity can be a potential blocker of deals. If this is the case, it’s definitely worth creating a local entity.

Creating a Local Entity: A Real Commitment and Investment

It is critical to understand the level of commitment entering Japan or any new country. Underestimating the costs and a misaligned timeline make the Japan entry a disastrous investment. Validating the Japanese market and having conviction is important to make sure that the investment pays off.

The initial cost of setting up an entity itself is not that high. If you file the paperwork yourself, you’d be able to incorporate a company for about 300k yen. If you incorporate with professional help, you’re probably looking at an additional 500k to 1m yen.

The real costs come from everything after the incorporation. Here’s some napkin math on the annual costs of operating in Japan:

1. Local Team (3-5 people): ¥30,000,000-50,000,000/year

2. Office Space: ¥5,000,000-15,000,000/year

3. Professional Services: ¥500,000-3,000,000/year

Even with a modest team of three, the annual cost would run over 30m yen ($200k). To truly commit to Japan entry after validating the market, three team members should be the base/minimum team. These hires would likely be a country manager or a local leader (who would double as the main account executive), a sales representative, and a customer support representative. The fourth hire may be a marketing generalist to acquire more leads in Japan. This is the base/minimum case, so even with a two-year outlook, the minimum budget allocation should be $400k.

Even with a small team, companies should budget over half a million dollars. Realistically, there should be additional budget allocation for marketing initiatives and future hires. There should also be a buffer, so the Japan-related initiatives aren’t too constrained by the budget. The actual budget for the initial two years may end up being closer to $1m depending on the level of expansion. Entering the Japanese market is not a light investment. With this level of financial investment, validating the market can help reduce the risk and make sure that the market entry does not end up being a distraction.

Conclusion

Setting up an entity and building out a team in Japan should not be a light consideration. The financial investment is sizable and setting up an entity should be considered only after market validation. There is plenty that can be done before setting up an entity and building out a team. Localization and GTM can be done without an entity. From a strategy perspective, Japan market entry should only be considered if the team is truly able to commit to it. If the Japan entry is going to be treated as a distraction and proper resources cannot be committed, you’ll be setting yourself up for failure. If you’re considering Japan market entry and would like feedback on whether you should set up an entity, book a free consultation here.