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Five ways the United Kingdom’s departure from the European Union could affect your company
Citizens of the United Kingdom voted to leave the European Union in a referendum on Thursday, a move that has implications well beyond the continent’s shores.
Even though just three percent of Canadian merchandise exports are sold to the U.K., the economic uncertainty and currency fluctuations in the aftermath of the decision are likely to affect Canadian companies of all kinds.
“We’re an Anglo-Canadian team and couple, [so] we had a choice as to where we set up our business,” says U.K. native Terry Johnson, co-founder and vice-president of Chatham, Ont.English-language proofreading and editing services provider Scribendi. “Let’s just say I’m a bit grateful to be in Canada this morning.”
The entrepreneurs referenced below all run firms that made the 2015 PROFIT 500 Ranking of Canada’s Fastest-Growing Companies. Here are a few ways Brexit could affect their businesses and yours, and what you can do about it.
1. Weak sterling, strong greenback
News of the outcome sent the British pound into a tailspin—it fell 10% against the U.S. dollar on Thursday night, and could drop even further according to some analysts. That’s bad news for Canadian businesses with U.K. clients who pay in sterling or who compete with British exporters.
But the bigger impact for most Canadian firms may be the rise in the U.S. dollar that has accompanied the pound’s fall as currency investors look for safe ground. In recent weeks, the loonie had been trending upwards following a January low of U.S.$0.68. Thursday night’s news caused it to drop ¢1.5.
Gift card program provider Samba Connects (#43) is set to feel the currency pinch on both sides says founder and CEO Alex Barseghian. The Mississauga company has a number of U.K. clients, including Jamie Oliver’s restaurant chain and big retailers like Tesco and W.H. Smith. They pay in pounds, so the lower the currency the worse for the company. Samba Connects has also been expanding into the U.S., and the greenback’s rise will up those costs. “We’re ratcheting up, so it’s an outlay of cash that I’m contributing to grow that business, [which is now] more expensive,” he says.
Samba Connects didn’t put any currency hedges in place before the vote, Barseghian says. “I should have done that,” he admits.
That’s not unusual says Omar Allam, founder and CEO of Ottawa-based Allam Advisory Group, an export consulting firm. “Most SMBs don’t have a basic foreign exchange policy, or even a formal currency risk management strategy that is aligned with their international strategy,” he notes. “These are the companies that are going to be hit the hardest and the fastest.”
If you don’t have a foreign exchange hedging strategy, now would be a good time to get one. That will help to minimize your exposure to currency fluctuations, reducing the risk to your cash flow, profitability and competitiveness. “It’s definitely become so unpredictable that there’s no way to manage it in line with your regular business activities,” says Karl Schamotta, Head of Enterprise Risk Management at Cambridge Global Payments (#197). He cites a Bank of Canada study showing that companies that use forward contracts, currency options and so on have a higher return on assets and better long-term performance than ones that don’t.
2. Wanted: A new gateway to Europe
Canadian companies often use the U.K. as an access point for mainland Europe says Dr. Sui Sui, Associate Professor at the Ted Rogers School of Management at Ryerson University. The common language and similar legal systems make it an easy market to set up and operate from.
Ottawa-based IT services provider Pythian (#209) is another such firm. “We had originally established Pythian Europe out of Prague, in the Czech Republic,” explains president and CEO Paul Vallée. “We wound down those operations to move them to London, despite the higher costs.”
The company’s European operation relies on the labour mobility regime that EU membership imposes. But that system was one of the key reasons—in the form of anti-immigrant sentiment—that fuelled Brexit, so it’s unlikely to remain in place. Pythian was on the cusp of what Vallée calls “a meaningful European growth investment,” and will now have to consider whether that money is best spent in the U.K.
Other Canadian firms are also rethinking their expansion strategies. Take Burnaby, B.C.-based Binary Stream Software (#372). “We were planning to start a subsidiary in U.K. as a head office for Europe,” says president and CEO Lak Chahal, who lived in England for 22 years before moving to Vancouver two decades ago. “This will be now totally out of question.”
3. A U.K. recession?
Plenty of economists have predicted significant damage to the British economy if it decoupled from the EU. “It’s entirely possible the people of Britain have just become the first in history to vote for a recession,” writes Canadian Business columnist Kevin Carmichael.
That will hurt the kinds of families that play the mobile games made by London, Ont. studio Big Blue Bubble. “The good news is that individuals and families will always need their entertainment, and they will continue to spend,” says CEO Vikas Gupta. “The concern is that there’s cutbacks—in the face of economic uncertainty, certain disposable expenses do start to shrink.” Though the U.S. is the biggest foreign market for export-focused Big Blue Bubble (#116), the company does considerable business in Britain and elsewhere in Europe. Samba Connects would be similarly impacted by wallet tightening among consumers. “Discretionary spending is going to decrease, so overall I’m going to take a hit as well on sales, I imagine,” says Barseghian.
On the flip side, Schamotta says Cambridge might receive a “modest boost” in demand for its foreign exchange and payment services. Toronto’s Crawford Technologies (#366), which makes correspondence and document tracking software, also anticipates an uptick in work. “We are cautiously optimistic that our UK business will strengthen as UK companies realize that they need to move forward at full speed, and will need to up their game as they can no longer rely on their membership in the EU ‘club’ for success,” says president Ernie Crawford.
4. Trade barriers to Britain rise
Much has been made in recent years of the opportunities created by the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU was. The deal, which is still under review, removed most tariffs on Maple Leaf-flagged goods entering Europe says Allam.
Brexit will remove the U.K. from the deal’s purview, and politicians like Jason Kenney have called for Canada to immediately enter negotiations with the soon-to-be excluded country. But negotiating a U.K.-Canada free trade agreement could take a decade says Allam. “Who are going to be the big prize-winners going in to negotiate agreements with the U.K.?” he asks. “Sadly, Canada won’t be up there in the top five.” None of the U.S., India or China have bilateral trade deals with Britain, and those three are retain to head the queue. In CETA’s absence, the delay means Canadian companies may face import tariffs when they export into the U.K.
These challenges highlight the important of geographic diversification for businesses with global ambitions. Scribendi (#245), for example, exports to more than a hundred companies, so Brexit won’t hurt the company too badly. “If you’re already looking into the U.K. but you’re not looking into New Zealand and Australia, those might be easy targets,” Johnson advises. “Give yourself that added comfort of having diverse markets.”
5. Uncertainty rules the day
The currency fluctuations resulting from Brexit have been accompanied by steep falls in most major stock exchanges.“There’s a lot of unknowns at this point about how this exit will proceed, because this will take two years.” says Sui.
In the run up to the vote, there were already been signs of slowing hiring and business investment in the U.K. and Europe says Schamotta. “Those things are certainly going to act to chill global trade, and that’s going to have impact on any business doing business anywhere.”
A sober analysis of your exposure to European and global markets is certainly in order. But Johnson cautions other companies not to lose their heads. “Don’t panic, because there’s a lot that’s still to be worked out.”
Source: Profit Guide