Just when SMEs thought they knew the lie of the land in terms of the Brexit timescale, Theresa May has caught them by surprise. Salvador Amico of Menzies asks how SMEs should react to the news of a snap election on 8 June
Just when small and medium-sized businesses thought they knew the lie of the land in terms of the Brexit timescale, prime minister Theresa May has caught them by surprise. But should SMEs be happy or concerned about news of a snap election on 8 June?
The prime minister’s decision to trigger a snap election could be beneficial for UK SMEs, especially considering the markets’ initial positive reaction and sudden jump in sterling. Moving quickly towards another general election, two years ahead of schedule, could allow the prime minister to secure her Conservative majority in government, quieting her vocal backbench and paving the way for a more favourable Brexit negotiation process.
Had she chosen to wait until the Brexit negotiations were well underway, the next election would have ended up being a referendum on election terms. By moving ahead of schedule, three years’ breathing space has effectively been secured with which to ensure a smooth transition.
In the immediate aftermath of the prime minister’s announcement, sterling has strengthened in value significantly, suggesting that UK businesses believe that the polls will turn out to be right. However, the business community must remember that polls do not always mirror reality and prepare accordingly. Despite this, many SMEs, particularly those in the manufacturing sector, have seen the cost of imports rise significantly since last year’s EU referendum and this week’s increase in the value of sterling will bring welcome relief.
Although markets have reacted positively, SMEs should prepare for more volatility. In a trading environment where currencies are heavily influenced by party political polls, it is often a tricky task to plan ahead. For many SMEs, the biggest threat is exchange rate volatility and the difficulty this poses when it comes to predicting the prices of goods and services. In order to address this, businesses should aim to secure hedging arrangements such as forward exchange contracts. In some instances, it may even be possible to negotiate payment of overseas suppliers in sterling, which could take currency risk out of the equation altogether.
With the countdown to March 2019 underway, some businesses may be concerned that the snap election will delay proceedings. However, if the election goes the way the polls suggest, the prime minister will enjoy a stronger majority and be better placed to progress negotiations without opposition from parliament, securing a speedier outcome. Despite this, we are continuing to advise businesses to plan ahead on the basis that World Trade Organisation (WTO) tariffs will probably apply to all EU trade deals after March 2019.
The goal of securing a majority in this snap election could prove a powerful move, particularly if it affords the prime minister a stronger hand at the negotiating table. Suddenly, the prospect of a softer Brexit seems more likely and some key pieces of legislation may be pushed through. One particular area of interest would be the free movement of labour. This could be a welcome outcome for small and medium-sized manufacturers, which rely on skilled workers from the EU.
Finally, SME business owners looking to exit are also well-placed to achieve a good valuation if the current market conditions prevail. Over the past 10 months and since sterling has depreciated by 20%, there has been a marked increase in mergers and acquisitions and inward investment in the UK by international buyers, particularly from businesses based in the US and Europe. The weak pound has resulted in buyers viewing many UK businesses as shrewd investment opportunities. For UK SMEs looking to sell up, this increased investment activity could offer a convenient way out.
All in all, the snap election means yet more short-term turmoil and uncertainty, but there could be a better outcome in the long run if soft Brexit predictions come good. There could also be positive trading or M&A-related opportunities in the meantime for some.
Salvador Amico is partner and head of the Brexit advice team at accountancy firm, Menzies LLP.