There is no shortage of uncertainty around the UK’s withdrawal from the EU. What we do know, however, is that the British pound immediately suffered the consequences of jittery investors: just three days after the UK officially left the EU on 31 January 2020, it fell 1.3 per cent against the dollar and 0.88 per cent against the euro.
However, a weakened pound is just one of the many expected outcomes associated with the UK’s departure from the world’s largest trade block. Having already cost the British economy an estimated £130 billion since the result of the referendum in 2017, Brexit’s economic impact is predicted to cost the UK approximately £200 billion by the end of 2020.
The uncertainty – and, ultimately, the outcome – of doing business post-Brexit might also affect family firms in the UK, which make up 85 per cent of private sector companies and employ more than 13 million people (38 per cent of all employment in the region). Moreover, family-owned businesses account for 28 per cent of the UK’s GDP, contributing a total of £600 billion to the economy. Here are five ways in which Brexit is likely to affect family firms:
Currency Competitiveness and Costs
A weakened pound will make firms in the UK more competitive both in Europe and beyond. As a result, they may benefit from a boost in international customers looking to take advantage of the pound’s weakened position and pay less for products and services. This is particularly applicable to the tourism sector, which could see an influx in business as foreign travellers seek inexpensive UK vacations, while an increasing number of UK residents take staycations in the face of swelling travel costs. However, the lower price tag of doing business in the UK translates to higher costs for family firms dealing internationally, which will likely have to raise their prices against a higher euro or dollar, offsetting some or all of the potential customer gains. Consequently, in the wake of Brexit, UK family firms can expect a reduction in sales by, on average, 3 per cent.
A Shallower Talent Pool
A skilled workforce is a vital component in any company’s success and a valuable resource for family firms in particular. Currently, approximately two million EU workers supplement the UK workforce, with EU citizens representing 25 per cent of the three million workers in the UK hospitality sector. Potential Brexit-influenced regulatory barriers to hiring outside of the UK, as well as impediments affecting EU migration, could create a skills gap that would have significant consequences for family firms in the UK.
Furthermore, immigration to the UK has fallen since the 2017 Brexit referendum, and the severity of the situation resonates in estimates of as much as an 80 per cent reduction in immigration from the EU now the break has been made, which will also contribute to a shallower talent pool. Moreover, the Federation of Small Businesses has raised additional concerns over new and complex employment administrative requirements that 95 per cent of small businesses have no experience in implementing, which will affect a large number of family firms.
Supply Chain Challenges
In 2017, more than 235,000 UK businesses were involved in international trade. In the wake of Brexit, however, both imports and exports will be subjected to a new layer of complexity and associated costs, such as customs clearances and tariffs. These could have a profound effect on family firms’ ability to trade supplies, thereby forcing price increases and resulting in sluggish supply chains. Sectors dependent on the timely arrival of produce, such as hospitality, could initially be hit the hardest by supply chain challenges.
The Chartered Institute of Procurement & Supply (CIPS) found that 25 per cent of businesses with more than 250 employees have invested over £100,000 to redesign their supply chains in response to Brexit. However, with 40 per cent of UK businesses replacing EU suppliers with domestic equivalents, family firms in the UK could reap some benefits from Brexit’s intended localised economy. Even so, with 63 per cent of non-British companies expecting to relocate parts of their supply chain out of the UK, the net gains for family firms could be disappointing.
Roadblocks to Expansion
Many family firms in the UK rely on EU-funding programmes as a means for growth. Therefore, if the governmental small business grant and loan options are not replaced, family firms may struggle to expand or even remain at their current size post-Brexit. The situation is further compounded by a banking sector facing restructuring costs that are being directed to small businesses trying to raise capital. Therefore, prohibitive interest rates and fee hikes may prompt family firms in the UK to seek non-traditional peer-to-peer funding sources that come with their own risks and costs.
Some banks, such as HSBC, have come forward with funding options for small businesses to help mitigate finance obstacles that have arisen in conjunction with Brexit. HSBC’s small business loan fund, established in 2018, has grown to £14bn to facilitate international expansion and bolster the agriculture sector. Additional aid may come via new tariffs to support local businesses, which the UK has the ability to set itself after its departure from the EU.
Family firms, wherever they are based, often benefit from being locally owned. Post-Brexit, this may translate to a double advantage for family firms in the UK, which could find themselves propelled by strong demand for the “British” brand. However, legal and regulatory changes come with a cost burden that smaller businesses might find much harder to absorb. Issues related to brand names, designs and trademarks have the potential to completely upend family firms – or, at least, force less-than-ideal strategic solutions.
An Unpredictable Future
Although businesses do not usually embrace uncertainty, Brexit has left those in the UK with little choice. And, as the weakened British pound has demonstrated, uncertainty has the potential to shrink the UK economy and choke growth. However, planned governmental stimulus and infrastructure spending is intended to soften the economic ramifications of Brexit and boost the UK’s productivity back to its pre-2007 levels. Furthermore, the UK Government has assured the business community that negotiating new trade deals, specifically with the EU, is its top priority.
However, until the transition period ends on 31 December 2020, the UK remains in both the EU customs union and single market. Neither the UK nor the EU will likely benefit from trade tariffs, but the uncertainty of what will confront family firms specifically on the first day of 2021 brings its own set of impediments.
For family firms in the UK facing this uncertainty, the time before, during and after the Brexit transition period seems to call for a re-evaluation, a reset or even a focused attempt to “Brexit-proof” their operating model.