Tom Pickthorn, M&A Partner and Head of International at Mills & Reeve
Medium sized businesses — those with a turnover of between £10 million and £300 million — are the bedrock of the UK economy. They are also an ambitious bunch, with the great majority aiming to grow their turnover this financial year (2017-18). However, we also know that these businesses are facing significant challenges, including inadequate funding options and uncertainty caused by the ongoing Brexit negotiations.
Our recent report, Expanding International Horizons, shows that medium sized businesses are already being buffeted by the headwinds of the Brexit vote, struggling with currency volatility, waning demand and late payment. More than half of the businesses in our study have faced declining demand following the referendum vote and a similar proportion have experienced increased issues with late payment.
As Jeremy Corbyn commits the UK to a customs union with the EU and Theresa May battles with her party to agree Britain’s approach to its future relationship with the bloc, the country’s businesses wait with baited breath and increasing frustration. Nearly two thirds of mid-market leaders believe single market access is ‘critical’ and a similar number say that failing to reach a deal with the EU would cause significant damage to their business. Additionally, more than 60% expect that the administrative burden of regulatory and legislative change will cost their businesses significant time and money, suggesting that tremors will be felt whatever the outcome of negotiations.
Ever-resourceful, these medium sized businesses are taking measures now to deal with the current turbulence and the possible negotiation outcomes. More than half have increased their cash reserves since the vote and 60% are changing their pricing strategies, using price hikes to deal with smooth over of currency volatility and unpredictable cash flows. There’s also a sense of ‘battening down the hatches’, as many businesses reduce investment and postpone or cancel acquisition plans in preparation for the UK’s EU exit.
Looking beyond Europe
Although this may sound somewhat gloomy, there is an important silver lining here. As some European nations and other developed economies experience sluggish growth, emerging markets must become an increasingly important focus for UK businesses with ambition. Developing economies like China have burgeoning middle classes with increasing levels of disposable income, offering appealing export potential. At the same time, the US is showing reasonably good GDP growth and continues to be our key export market . Our study found that more than 60% of medium sized businesses are planning to increase their investment in exports beyond the EU, suggesting that Brexit is encouraging UK companies to look beyond European markets for growth opportunities.
Expanding international horizons
Currently, the country’s medium sized businesses have limited international reach. On average only a quarter of business turnover is generated by exports and barely 20% of turnover comes from international operations. Our study also shows that international presence is correlated with business performance: high performing businesses (those that achieved turnover growth above 20% last year) tend to have a more extensive international presence and businesses that have not experienced turnover growth generally have a lower level of international operations.
This makes sense. Businesses that concentrate predominantly on the domestic market are more vulnerable to British market uncertainty, and may have fewer opportunities for growth. As a result, it is heartening that so many are seeking to increase investment in exports beyond the EU. The top non-EU countries that businesses plan to target are the USA, Canada, China, Australia and Japan. As the British government looks to negotiate post-Brexit trade deals, mid-market leaders will be watching conversations with these countries keenly.
We also see that more than half of medium sized companies are looking to increase their investment in operations beyond the EU and that nearly two-thirds are expanding or reorganising their supply chain beyond the EU. Although this suggests that there is plenty of hard work to be done, these efforts should make Britain’s crucial mid-market companies more robust and bolster their growth.
There are also signs, however, that companies are hedging their bets. Amongst the businesses that plan to increase activity in Europe this year, France comes out as the most popular location for expanding operations, suggesting that companies may be seeking a foothold in a nearby European country in preparation for the UK’s EU exit.
France is perhaps an obvious choice. It’s not just its proximity to the UK that makes it attractive, but also its good road, rail and air infrastructure and its geographical location for trading between northern Europe on the one hand and southern Europe, Africa and the Middle East on the other. In addition, President Macron’s fiscal and labour law reforms have made the country more appealing to businesses.
Medium sized businesses with big ambitions
When it comes to the UK’s relationship with the EU and possible trade deals with other nations, the future is still deeply uncertain. What we can be sure of, though, is that Britain’s all-important medium sized businesses are already taking prudent measures to deal with the fallout of the referendum vote and the possible outcomes of the negotiations.
While some are reducing investment and delaying acquisition plans, the fact that so many are also looking for opportunities beyond Europe shows courage and ambition. Companies that are eyeing future growth should have emerging markets firmly in their sights. It may just be that Brexit gives mid-sized businesses the prompt they need to branch out.