One of the key manifesto promises of the Conservative party in the general election of 2015 was to hold an in/out referendum on the UK’s continued membership of the European by 2017. Prime Minister David Cameron has said that he is “not happy with the status quo” of how the institution serves Britain’s needs and has vowed to renegotiate the terms under which the country will continue to play a full part in Europe.
Partly due to the desires of the Euro-sceptic wing of his party and under the challenge of the UK Independence Party, which won some 12.6 per cent of the popular vote in the parliamentary elections in May, Mr Cameron needs to win significant reforms from the powers-that-be in Europe in order to be able to say that the union – in his terms – is fit for purpose.
Although the Prime Minister has defended Britain’s role in the European Union repeatedly over the years, he has never promised that he would under any and all circumstances campaign on the side of continued membership during a referendum campaign.
The Meaning For UK Business
In terms of UK businesses, the question of a so-called Brexit, or British exit from the European Union, creates two significant questions. Firstly, what reform can the Prime Minister’s team successfully negotiate with European Commission President Jean-Claude Junker and the other European leaders in order to win over some of the members of his party who might rebel against him in an oncoming referendum and join the likes of UKIP? Secondly, how will the doubt created by the referendum, particularly when the campaign gets into full swing, affect the confidence of the business community in the country?
With both of these questions currently unanswered, business owners ought to think about how much impact they will have. Anyone who has a business model that relies on European suppliers or customers will obviously have an interest. However, more widely, UK-based businesses which only trade on a domestic basis may find that their future plans need to be adjusted due to the widespread changes to the UK’s economy that may follow a Brexit.
Business Sales Impact
Of particular concern among the British business community will be the effect on valuations for many firms during this period of doubt. Given that the average UK business takes about twelve months to sell, anyone considering finding a buyer for their business in the near future may discover that there is a negative effect on the valuation of it because the sale goes through so close to a potential UK exit. After all, the 2017 deadline set by the government for the referendum is not so far away.
For any business owner who is looking to sell up and move on before then, the time to begin the process is probably right now, before the campaigning – and to some extent scaremongering which is likely to feature in the referendum – kicks in.
Of course, the cross-talk of politicians is unlikely to create a negative effect on business valuations in its own right. Rather, the more the UK’s exit becomes a possibility, the more likely it is that potential buyers will use it as a negotiating tool to get the best price possible for a business they are looking to buy.
Although all UK business are likely to see the referendum effect on their respective valuations, it is those which are closely linked to European trade which will suffer the most, in terms of their perceived market worth. Several European Union states, like the UK, operate outside of the eurozone, so importers and exporters from these countries will probably witness a lesser impact. However, anyone who buys goods or components from Germany, France, Italy and Spain, for example, may have to significantly restructure their supply chain should the exit come about post-referendum.
All of this means cost for UK businesses which potential buyers will immediately recognise when they go through the books. Likewise, those businesses which have customers in the eurozone, from Greece in the east, to the Republic of Ireland in the west, may see increased competition from other suppliers who remain in the European Union. If the worst fears are confirmed, and the buying power of companies in these states remains within the eurozone, businesses outside of the EU will have to find alternative customers, maybe further afield in harder to reach markets, such as India, China, Brazil or Malaysia.
Will this mean UK businesses which sell into the eurozone markets will see a diminution in their valuations? You bet it will, whether this reflects the reality of their trading position or not.
Freedom of Movement Concerns
The turbulence of the renegotiation period and subsequent referendum will also have a negative impact on British businesses that rely on specialist skills brought in from the European Union. Parts of the agricultural and life sciences sectors may well see that the UK becomes less attractive for migrant workers during this period, meaning that a potential business sale may be affected. For such companies, this so-called referendum impact will be as nothing compared to an exit or the renegotiated restriction of the freedom of movement of European citizens. Under such circumstances, companies that rely on attracting talent from Europe may not be able to trade in anything like the same way again.
Continuity Versus Discontinuity
It should be noted, however, that the calls for continuity between the UK and the European Union are not to be underestimated. Not only do most of the major parties, except UKIP, currently support some form of continued membership, even if it has been renegotiated significantly, but the polling consistently suggests that a vote to remain in will be the outcome.
Only a couple of polls in 2015 have suggested otherwise – a small minority. Nevertheless, for all sorts of confidence-sensitive businesses in the country, the whole issue creates enough doubt to potentially make them harder to sell. This negative effect is not just restricted to those companies with a vested interest in the European Union, for example construction industry firms which win tenders directly from it, but almost all firms.
Steering through these choppy waters will undoubtedly take some skill and, especially for owners of businesses who are looking to sell up, some expert advice.