Can British companies still operate in Europe after Brexit?
British start-ups should remain agile and be prepared if they want to make the most of the post-Brexit landscape
The referendum in which 52% of Britons decided to leave the European Union (EU) has created uncertainty for British businesses.
In particular, British businesses with considerable operations in the EU are being forced to think long and hard about their future. And, as always, these issues are amplified for small businesses.
Some businesses have opted to relocate to Europe, or at the very least set up separate entities within the EU. The question is: will this really be necessary?
Agility will play a role in planning after Brexit
Most US Banks have opted to set up units in the EU to carry on serving their continental clients without having to worry about potential fallout in Britain. However, that doesn’t mean every business will have to have an entity in the EU. These banks are massive and operate in an environment full of red tape. They need to plan ahead and anticipate multiple scenarios.
Small businesses may be able to react faster and therefore may not need to commit to relocating or setting up a base in the EU just yet. Negotiations regarding Britain’s future relationship with the EU are still ongoing, and the EU seems to have the upper hand. Britain may have to concede a lot more than it would like, which may ironically result in less change for British companies operating in the EU.
According to a report by Silicon Valley Bank, by February last year, 21% of UK startups already planned to launch European operations ahead of Britain’s exit from Europe. Indeed, some small businesses may well have to consider relocating or opening a branch in Europe. But it all depends on the circumstances, and many businesses may be able to operate in Europe as British companies.
Currency concerns are exaggerated
One of the first concerns that are often raised in such cases is over currency risk. But these concerns may have been blown out of proportion and the worst is probably behind us.
The British pound weakened considerably against most other currencies in the wake of the referendum. However, after falling to a low of 1.075 in 2018, the pound has begun to stabilise and recover ground against the Euro. In fact, currency strength and weakness are less of a problem than volatility. While a trend towards further strength or weakness can be anticipated, currency volatility creates uncertainty. That makes decision making in a business difficult and causes clients to hold back on potential orders.
There are a number of reasons the Euro/Sterling exchange rate has historically displayed very low volatility. Most of the volatility resulting from Brexit is probably behind us, though there may be a few hiccups when the final deal is announced and just before the exit actually happens. Directional currency moves can easily be hedged, something that more and more companies are already doing. In fact, this could go both ways. Sterling may actually appreciate against the Euro once there is certainty over the future, in which case it will be exporters that will need to hedge.
The final Brexit deal could have benign consequences
While some even believe a second referendum could take place, even if it doesn’t Britain may well have to make serious concessions. It’s increasingly likely that Britain will have to accept a deal that leaves it with less control of its borders than it would like.
But that may ultimately mean a ‘soft Brexit' is still a possibility. This would leave Britain in some form of a trading zone with the EU and life for many businesses wouldn’t change that much. This is nothing new. Even if the negotiations ultimately lead to a hard Brexit, it doesn’t mean a UK based business can’t operate in Europe. In the case of a hard Brexit, a UK business operating in the EU will be the same as a British company operating anywhere else in the world. Thousands of British businesses already operate in the US, Asia, Australia and Africa – although it's the UK that actually tops Forbes' Best Country for Business list for 2018.
We live in an increasingly globalised world, and the successful companies are those that operate globally. The UK’s decision to leave the the EU may be a reaction against globalisation, but most businesses agree that they want to operate internationally. UK companies will therefore need to either work out what they need to do to trade in Europe post Brexit – or look to trade in other markets. Based purely on geography, it makes sense to trade in Europe before looking elsewhere.
Be prepared for Europe
Just because British companies can operate in the EU, it doesn’t mean they don’t need to be prepared. Make no mistake – transitioning to a new relationship with the EU will be a headache and will cost money. However, unfortunately, businesses have little choice. The FT published a to do list listing several areas where companies need to make sure they are up to speed ahead of Brexit.
In particular, they highlighted the need to prepare systems to handle customs procedures. The report also pointed out that companies will also need to study their supply chains and work out where taxes and handling costs may have an impact. In fact, this may be the biggest factor in determining how businesses operate in the future.
In addition, companies will need to flag any international contracts that will need to be renegotiated. They will also need to make sure they have consultants to help them formalise agreements quickly under a new legal environment. Most businesses that operate in the EU will need to manage their cash flow even more carefully than in the past. It’s likely they will have to hold more inventory and will have more cash tied up in VAT payments than in the past.
Some businesses will have to relocate
For certain businesses, Brexit will mean they won’t be able to be based in the UK and trade in the EU. If their margins are already too narrow, and increased taxes and handling costs will push them into the red, they will simply have to relocate or establish new operations in the EU. A business that imports components from the EU and then exports finished goods back to the EU is likely to find the whole exercise extremely expensive.
In that case, it clearly makes sense to establish a new base in the EU. On the other hand, businesses in the services sector that have relatively high margins may see a limited impact. Regardless of the Brexit deal, British companies will have to comply with GDPR regulations with regard to customer data – so this is not dependant on their location.
In fact, partnerships may be the answer. In many cases, partnerships and licensing deals may offer a compromise. Partnering with an EU company to manufacture and distribute products, could allow companies to avoid the upfront investment required to set up an entire operation. Sure, deals like this may eat into profits, but they also reduce the risk of committing investment to an uncertain future.
So, can UK businesses continue to operate in the EU as they have in the past? Unfortunately, there is no ‘one size fits all' answer to this question. It really depends on the specific circumstances.
The best way to make informed decisions is to map out all the alternatives. One of those alternatives is to stop operating in the EU, another to relocate the entire business, yet another to create a separate European entity – and the final option is to partner with a EU company. Only when the costs of each option are properly evaluated can a business make the right decision.