By Tom Pickthorn, M&A Partner and Head of International at Mills & Reeve
Mid-market businesses are bracing themselves for the impact of Brexit and looking beyond Europe to shore up their future successes. The road ahead is becoming increasingly complex, leading to various challenges, specifically for mid-market businesses.
Despite this, research from national law firm Mills & Reeve found that a majority of firms remain ambitious about growth, with more than four in five planning to increase turnover this financial year by a confident average of 22%. It must be hoped that business leaders who are able to see the opportunities in all the uncertainty will be rewarded for their efforts.
Two-thirds of business leaders have expressed frustration at the roadblocks that seem to be popping up along their path to growth. Sentiment in some ways seems quite negative, with over half claiming they do not view the economy as “strong and stable.”
This is not entirely surprising as larger, more well-established organisations may have the resources to mitigate risk in uncertain times while mid-market businesses have to navigate these winding roads on their own. Ongoing uncertainties around Brexit are undoubtedly creating substantial new pressures that business leaders will need to address.
In particular, the pound’s fall in value has had various implications. While a weak currency may be good for exports, fluctuations in currency make it difficult to manage foreign exchange risk. This is ‘top of mind’ for business leaders, with over half agreeing that currency volatility is damaging their business. This comes in addition to declining cash flows caused by increased issues with late payments which have been experienced by more than half of businesses since the Referendum.
Unsurprisingly, nearly two-thirds of mid-market businesses claim that failing to reach a deal with the EU will cause significant damage to their business. Whether a deal is reached or not, there will be an inevitable impact. Regulatory or legislative change always leads to an administrative burden, costing time and money, neither of which are a luxury that businesses possess.
In addition to financial burdens, the lack of talent is a recurring topic of concern. Already nearly half of mid-market businesses are worried that they lack the skilled workforce required for growth, rising to 60% of those who have experienced a decrease in turnover. The threat of Brexit only intensifies this issue, with business owners expressing equal anxieties over their ability to retain low cost and specialist labour.
Mapping a Route
While the odds may seem to be stacked against them, mid-market businesses remain confident in their ability to succeed. Of those that plan to grow this year nearly two-thirds would be willing to bet their house on meeting their target.
An offensive strategy may prove to be the best one, as the majority of businesses that achieved high turnover growth last year focussed on capitalising on opportunity rather than managing downside risk.
However, balance is rarely achieved easily and mid-market businesses need to implement various measures in order to effectively ride out the EU referendum. More than half of mid-market business leaders have increased their cash reserves, adjusted pricing strategies, reduced investment and postponed or cancelled acquisition plans.
The most common strategy has been to look for new roads. Nearly two-thirds of mid-market business leaders have decided to increase investment in exports beyond the EU.
Finding New Roads
At the moment, most mid-market businesses have minimal international scope, which makes any uncertainty on the home track even more perilous. On average only a quarter of turnover comes from exports. However, businesses with larger international reach seem to be ahead in the race, with high performing businesses reporting 27% of turnover generated by international operations. This drops to 21% on average and just 16% for those experiencing flat levels of growth.
Expanding operations internationally is one of the top five reasons that businesses intend to increase their investment in growth. Supply chains are also top of mind, with nearly two-thirds of mid-market businesses expanding or reorganising their supply chain outside the EU.
Regardless of how uncertain and potentially challenging the Brexit decision has made the road ahead, it may have been the push mid-market businesses needed. This shift to expanding horizons may help businesses capitalise on the future economic growth that will likely be driven primarily by emerging markets rather than our closest neighbours. Businesses that are willing to look beyond Europe can expect to move ahead in the race.