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What would Brexit mean for the business for sale marketplace?

June 21st, 2016 by Chris St Cartmail

The European Union: are we in or out? brexit

Britain will make its choice on the 23rd of June. The vote has already become personal, the heated debate is inescapable and the media scaremongering has seen each side giving as good as they’re getting with hyperbole and accusations.

But when it comes to the future of the British economy, is it possible to put emotion aside and make a clear decision as to what’s best for business? And for those in the M&A industry, is it really possible to make a clear case in favour of either side at this point?

Out

As far as business is concerned, unsurprisingly the vote is for the path of most profit and least resistance. But it’s unclear just which way that lies.

The argument in favour of leaving the EU hinges on profit. When it boils down to it, the EU is not as valuable as it once was as a trade partner for Britain. Britain joined the European Economic community in 1973, back when regional trade blocks made a great deal more sense than they do in 2016.

Today’s business world is dominated by cheaper international shipping options and, of course, the game-changer that is the internet. This new approach vastly increases our options for trade partners the world over, but, by remaining a member of the European Union British businesses have their hands tied and are unable to negotiate favourable trade deals with other economic regions.

While the EU still represents a sizeable 45 per cent of UK trade, it is on a downward trajectory and has fallen notably from the 55 per cent it represented a decade ago. The ‘Out’ argument suggests that leaving the EU would enable British businesses to negotiate their own deals with other businesses across the world, whatever their region.

Conservative MEP Daniel Hannan, claims that the EU was the same size at the end of 2015 as it was in 2006. He added: “We [Britain] are a trading people. We don’t sit on great natural resources here, we have to make our way by what we buy and sell, that means we have to be where the customers are. And that means as long as we’re in the European Union, we cannot sign independent trade deals with non-EU countries.”

For those involved in mergers and acquisitions in particular, a vote for ‘Out’ could open the doors for negotiations with other trading regions. Furthermore, it could also reduce the current EU red tape that overseas buyers are forced to negotiate when acquiring a British business.

The outcome of a reduction in red tape is uncertain, but there is clearly the potential that British business buyers will find themselves facing greater competition with international operators. Equally, those selling a company may find that they have more options on their cards. Furthermore, if a profound currency depreciation were to occur following a vote to withdraw, then this would make UK acquisitions proportionately more attractive to foreign buyers.

Lord Bamford, chairman of international manufacturer JCB is an industry insider who strongly backs Brexit: “We are the fifth or sixth largest economy in the world. We could exist on our own – peacefully and sensibly”. He adds that the UK would be able to negotiate trade deals as our country “rather than being one of 28 nations”.

In

While those in favour of ‘Out’ are chasing profit, those in the business world voting ‘In’ are focused on sticking to the path of least resistance. For business, this means avoiding uncertainty.

Estimates from the CBI have suggested that Britain could be hit by a short-term shock to the economy to the tune of £100 billion. Should the shock play out, the country could see five per cent knocked from its GDP at which point the risk of another recession raises its rather terrifying head. The predicted cause of this would be a drop in stability for UK exporters. While they will most likely find a means to realign or, if the ‘Out’ side proves correct, to increase their export revenue, it will take time, both to adjust business procedures and supply chains, and to see through negotiations with the EU.

Simon Walker, the head of the Institute of Directors (IoD), said that Brexit would be ‘disastrous for the country’ and added that the majority of his members support the Remain campaign. The latest poll of IoD members showed that 60 per cent wished to remain in the EU, against 31 per cent wanting to leave and 9 per cent undecided.

While nobody can say for sure how trade negotiations with the EU or other trade blocks will go, keeping the current status quo with the EU is a reassuring option for many business owners and those considering buying; it allows them to know what’s coming and plan for it.

Owners and potential buyers of companies that trade with the EU do have a legitimate concern about the absence of a convincing post-Brexit trade and economic model in the Leave camp. An extreme take is that their EU sales could vaporise if the Community were to punish Britain with tariffs. And even if that punishment were not intentional, there could well be an indeterminate period before new free trade zone deals were negotiated.

In a recent survey of British M&A dealmakers, 92 per cent believed that the UK leaving Europe would have a negative impact.

The best way forward

The issue with Brexit is a common one across all areas of business. It is of course uncertainty; we simply can’t predict what will happen and this causes anyone with assets at risk to reassess their position. During this period of uncertainty leading up to the vote, there is likely to be a lull in M&A activity as companies hold off whilst factor volatility, including exchange rates, rides high. It will be interesting to see Q2 2016 statistics, but if the lead-up to the Scottish independence referendum is anything to go by, deal volume could be down by 50 per cent in the April to June period.

Ultimately, however, there is no best way forward if we are solely focused on the effects on M&A. The choice to vote in or out of the European Union will for most people be much bigger than simply an economic prediction, with migration, politics and personal belief all playing important parts, not to mention peer pressure and the media.

There is a growing business contingency that believes business, and the M&A sector, will be fine whatever happens. Kevin Uphill, chairman of Avondale business brokers, is among those who has a firm belief in the flexibility and strength of UK business and M&A operators regardless of whether Britain stays or exits the EU. He says: ‘My prediction – whether Britain leaves or remains in the EU – is that UK business (and with it M&A activity) should remain largely unaffected, will rapidly adapt to whatever environment we are presented with, and continue to grow.’

Also read: M&A dealmakers reveal concern over Brexit

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