What small businesses should be doing ahead of Brexit

Many small businesses have had little guidance as to what to expect when the UK leaves the European Union. Danielle Levy asks business representatives how companies can prepare

With less than two months until the UK is due to leave the European Union (EU) and a deal yet to be agreed, small businesses could be forgiven for feeling nervous.

At the time of writing, the House of Commons had voted against leaving the EU with no deal and was in favour of renegotiating the Irish backstop. However, with little progress made since the House of Commons vote in late January, companies across the UK continue to face uncertainty.

As we approach the final leg of the countdown to Brexit, how can companies prepare?

Allie Renison, head of EU and trade policy at the Institute of Directors (IOD), an organisation for company directors, senior business leaders and entrepreneurs, suggests starting by evaluating your company’s place within a supply or value chain. Consider whether there are any parts of the value chain that could be affected by certain aspects of Brexit, whichever path it takes.

“This includes knowing your supplier’s suppliers and your customers’ wider commercial links, so you can anticipate any negative effects reverberating upstream or downstream,” she explained.

Brexit-proof your contracts

Management teams should also assess the repercussions of deal or no deal scenarios for any EU nationals they employ, and whether any intellectual property protections that a company relies on are derived from EU regulation.

“Brexit-proofing contracts, especially those with cross-border elements, isn’t just something larger companies should explore. The next step beyond supply chain checks is ensuring you have the ‘B-word’ chat with your customers and suppliers, so that you aren’t leaving it until a nasty surprise comes along afterwards,” Renison added.

For example, some companies have inserted Brexit clauses into contracts, making reference to ‘material adverse change’ and spelling out how pricing terms may need to be revisited or renegotiated, depending on how hard or disorderly the UK’s exit from the EU turns out to be.

Small companies which trade directly with the EU and sell goods will be most affected by Brexit. There will also be repercussions for those with indirect trade links. For example, companies that buy from or supply businesses which directly import or export from the EU.

This is because there will be changes for companies selling goods to the EU as a ‘third country’, which is how the UK will be described if it leaves the single market. The IOD estimates that agrifood and transportation are likely to see the most immediate changes within goods trade.

Ryan Barnett, economic policy adviser at the Association of Independent Professionals and the Self-Employed (IPSE), notes that a no deal scenario is likely to increase the costs on importing goods from the EU and potentially slow down trade.

IPSE is advising its members who may be affected to talk to suppliers outside of the UK about how trading will proceed during a transition period, as well as in the event of a no deal.

Time to plan

Renison suggests that smaller companies should focus as much as possible on what is known when it comes to Brexit planning.

“A significant 40% of IOD members say they are doing no contingency planning because they plan to just adapt to changes once they are in place. It is very risky to bank on such a strategy because there is absolutely no guarantee of a transition period in which to make these adjustments if we are in a no-deal scenario,” she said.

If any companies have questions about the potential repercussions of the UK’s planned exit from the EU, Renison suggests raising them with relevant trade bodies to gain a better understanding of what might happen later down the line.

If any questions can’t be answered by the Government, they can be referred to the EU’s range of no deal contingency notices, particularly for any business with an interest in operating within or accessing the EU.

“Doing nothing shouldn’t be the default, unless a company is absolutely confident that it is totally insulated from any potential Brexit exposure,” Renison added.

The Federation of Small Businesses (FSB) also has a Brexit hub, which outlines the various ‘end state’ Brexit scenarios. This hub could prove particularly useful for companies which trade with the EU directly or indirectly; employ staff from the EU; are in direct receipt of EU funding; or are involved directly or indirectly in a supply chain.

Uncertainty reigns

Even beyond companies with direct links to the EU, the repercussions of Brexit are being felt across the UK’s smaller companies.

For example, housebuilder CHI Homes has changed its short-term strategy as a result of the uncertainty created by Brexit. Alli Gay, founder of CHI Homes said the company plans to change the way it works over the next year.

“We are probably not going to buy something to build, we are probably going to focus our assets on speculative plots of land to gain planning permissions over the next nine months to really get over the hurdle of Brexit.

“We will look to make some profits quite quickly by the end of this year by increasing the value of plots that way, rather than buying something that has already got planning permission and building it out – when potentially we could have material and labour shortages,” Gay explained.

She notes that a no deal would be a disaster for the building sector. This is because it is likely to result in a shortage of labourers as well as building materials, particularly timber, which are imported. This is why the company has decided to change its strategy for the year ahead.

If there is a no deal, she says the company is likely to extend its focus on buying land rather than building houses. Meanwhile, if a deal is agreed CHI Homes will return to its original strategy of building houses.

The company has placed plans to hire more people on hold until there is greater clarity regarding the UK’s exit from the European Union.

Recession fears

The uncertainty created by Brexit is also being felt across other sectors.

Funding Options, a marketplace which connects small businesses and lenders, conducted a review last year and concluded that the regulatory impact of Brexit on the business would be reasonably limited.

However, Conrad Ford, chief executive of Funding Options is more concerned about the potential impact that Brexit could have on the economic environment in the UK, particularly if a no deal sparks a rapid recession. Funding Options would be affected if this, in turn, led to a credit crunch situation, with significant demand for funding from businesses and an undersupply of lending.

“Our world would change quite radically in a short period of time,” Ford added.

While most of the businesses which use the Funding Options platform do not export into Europe, he notes that the uncertainty created by Brexit has impacted confidence.

“Small businesses are taking a ‘wait and see’ approach, which means if they don’t have to raise money they are not raising money. We are seeing that sort of caution, which frankly is sensible in my view.

“Most funding demand we are seeing is not around exciting growth opportunities, but rather for more traditional needs for funding, like meeting tax bills,” Ford explained.

While the next six to 12 months are likely to be challenging, IPSE’s Barnett suggests that companies and independent professionals should try to avoid panicking.

‘There is a deal largely thrashed out. There are alternatives on the table and parliament has little appetite for a disruptive no deal. Nor does the government. A cautious attitude to business is the best way to go until there is more certainty.

“This, however, does not mean taking any rash decisions. Put the health of your business – in the immediate and long-term – first,” he concluded.

Danielle Levy is a freelance financial journalist

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