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Charting the future: Gauging the Brexit impact on US business

24 August, 2016

Andrew Miller
Partner, Deals, PwC US

The surprise decision by UK voters to leave the European Union has triggered plenty of what-next and what-if questions in the UK and EU. But what about businesses based in the United States? What’s next for them? How do you know if your business could be affected?

Let’s take a look at four factors that determine US company exposure:

1. The health of the UK economy: Is your business highly sensitive to financial market returns? How has it absorbed the pound’s decline? Are your investment fortunes tied to the performance of the UK economy? How dependent are you on UK customers and distributors to drive sales? Are your investors UK-based?

2. The tax, regulatory and legislative landscape in the UK: How invested are you in the UK? Do you have operations located there? Own real estate or inventory there? Is it your gateway to the EU?

3. How goods and services move between the UK and the EU: Do you rely on UK/EU-based suppliers and production operations?

4. Free movement of people between the UK and the EU: Does your firm rely on people moving back and forth between the UK and EU? Do you depend on UK-based talent for key roles?

Depending on how you answer these questions, the effects of Brexit could bring new risks and opportunities for your US-based companies. So, we looked at the implications for the near-term, medium term and long-term, to help you gauge the potential effects you may feel at each stage:

Implications at-a-glance

The most immediate financial effect of the Brexit vote for US companies has come from volatility in the currency markets. US companies engaged in business transactions with the UK (and potentially even the EU), will now need to assess the typical financial reporting considerations that come with foreign currency volatility: impact on hedging strategies, treasury management, collectability of receivables, potential asset impairments, intercompany transactions and the like. At the same time, safety-seeking investors are leading a wave of investment into US corporate bonds. Over the medium term (2017-2018), if the dollar continues to strengthen we expect it could slow US exports, as US-made goods would become more expensive for UK buyers. If your business operates in the UK, you could expect regulatory changes, perhaps even immigration restrictions from the UK to the EU.

Longer-term (2019 and beyond), there will be increased focus on trade. As the UK negotiates new treaties or agreements, the period of economic uncertainty could drag out due to the time it would take to negotiate with both the EU and non-EU countries. In addition, the possible implications for trade, economic growth, currency volatility, free movement of labor across borders, availability of credit, and other key business considerations are all tied to the specific of how the UK moves forward.

Nobody can predict with certainty what the UK’s relationship with the EU will be after it leaves. That will play out over the course of many negotiations in the coming years. We’ve been monitoring this with our clients and have had a front seat in thinking through the possible outcomes with British Industry. In fact, PwC was commissioned by the Confederation of British Industry to provide a detailed qualitative assessment of the potential economic implications of both “leave” and “remain” scenarios. You can read about it here.

That brings us back to where we began: What impact will this have on US companies? The key to answering that is to begin assessing your business. Those with exposures will begin building scenario plans to determine what steps they will need to take to ensure stability and growth in the years ahead. It will be important to evaluate what drives value for your company? What strategic initiatives are you considering or may already be underway? What company and industry- specific issues or concerns could be affected in the post-EU environment?

EU and UK businesses are taking steps now, what steps are right for you? While the decision to exit the EU has raised many questions and created many uncertainties, US companies can begin their planning with the clarity of knowing what they do know: Their business and what it takes for them to thrive.