With a Looming Deadline and Plenty of Uncertainty, UK Entrepreneurs Grapple With How to Handle Brexit
The next Brexit deadline is April 12. Whether the outcome is a ‘soft,’ ‘hard,’ or ‘no-deal’ exit, small businesses and startups are preparing for the worst.
PHOTO CREDIT: Getty Images
When David Strang joined the Supper Club, a London-based networking group comprising some 450 founders, he relished the idea of being able to air his frustrations and fears, as well as trade ideas and best practices, with fellow entrepreneurs. These days, all anyone can talk about is Brexit.
"All we can do is sit tight and wait for the chaos to ensue," says Strang, the founder of Wicked Vision, a London-based maker of boomerangs and other toys. Should the U.K. leave the European Union without a plan for streamlining import and export tariffs and customs duties with its neighbors--that is, a "no-deal Brexit"--he fears the outcome could be "disastrous" for his business. Currently, he says, European buyers account for about 20 percent of his company's total sales, which he declined to disclose.
Strang is just one of many U.K. entrepreneurs grappling with how to operate--much less grow--in a time of extreme uncertainty. According to the latest survey from the Institute of Chartered Accountants in England and Wales, a membership organization for accountants and finance professionals, business confidence for the first quarter of 2019 hit negative 16.4 percent--the lowest level in almost a decade.
It isn't helpful that policymakers can't seem to agree on a withdrawal plan. The latest deal gives the U.K. until April 12 to agree on an exit plan negotiated between lawmakers and their counterparts in Brussels. The nation had been hurtling toward a deadline of March 29 without a deal for how to exit the E.U.'s single market, which allows the free movement of goods, capital, services, and labor among member countries.
Despite the momentary reprieve, entrepreneurs are busy making contingency plans--hoping to avoid erasing many of the gains they've made in the past few years. From ramping up sales to non-E.U. countries and inking new vendor relationships outside the trading bloc to relocating entirely, here's a look at how U.K. businesses are coming to terms with Brexit, deal or no deal.
Moving Out to Move Up
PVL U.K. is a Sussex-based designer and manufacturer of high-visibility, reflective safety markings for police vans, ambulances, and other emergency fleets. It serves 55 percent of the U.K. Emergency Service public-sector market, and provides all markings to the Metropolitan Police, the law enforcement agency for Greater London. PVL also has a healthy export business to Belgium, France, Germany, Holland, Poland, and Sweden, which amounts to 20 to 25 percent of the company's sales, or about 3 million ($3.9 million) this year. CEO Nick Broom expects export sales to ratchet up to as much as 35 percent next year, as the company recently won a job equipping the entire Belgian ambulance fleet in 2020. What's more, PVL imports almost all of its raw materials from the E.U.
With so much on the line, Broom isn't taking any chances. "Any increase on our raw materials will hit our margins if we cannot pass these increases on," Broom says. To prevent such a shock, the company is stocking materials at higher levels, and it is setting up an outpost in Belgium. Under a joint venture agreement, the company is training six employees of its Belgian business partner to handle operations for the time being, and Broom is in the process of moving equipment to the facility. He estimates that the training, materials, and management time he is putting toward the satellite plant, which he expects to be functional by the end of the month, will cost 150,000, or $198,000.
Similarly, Straight Teeth Direct, a direct-to-consumer orthodontics startup founded by Lucie Marchelot Shukla and Aalok Shukla, recently moved to diversify business ties. While the company based manufacturing in London, to be close to trusted suppliers, it set up its headquarters in Ireland in late 2016--an important move for establishing Straight Teeth Direct as a global company, especially in the aftermath of that summer's Leave vote. "We made sure we didn't build everything in the U.K.," Marchelot Shukla says. "Brexit or no Brexit, it's always better to be in multiple jurisdictions."
And to forestall any potential cross-border legal disputes, Straight Teeth Direct secured a costly global insurance policy that provides international coverage for both the dentists who work on the company's platform and for the invisible aligners it supplies. It took more than seven months to set up the complex policy, the price of which the co-founders declined to disclose. In 2017, the company also opened an office in Lisbon, a city that's fast becoming an attractive location for startups.
"We're very happy with the choices we made," says Marchelot Shukla. She adds that while establishing international outposts initially stemmed from the co-founders' ambition to build an international company, the move has helped navigate shifting laws under Brexit. "It has accelerated the whole process."
Reinforcing the Ranks
When moving isn't an option, figuring out how to stay--and how to keep European employees--is a real conundrum for many businesses. Depending on the terms of a Brexit deal, there may be stiffer regulations regarding the flow of labor across borders.
To limit a labor crunch, companies like Perlego, a London-based online e-textbook library, are asking employees hailing from the E.U. to file for either "settled" or "pre-settled" status through a process called the E.U. Settlement Scheme. This process describes the protocol for which E.U. nationals and their families living in the U.K. may stay in the country permanently after June 30, 2021. Those from certain E.U. countries, including France and Ireland, can apply for this status now, while citizens of Iceland, Liechtenstein, Norway, or Switzerland must wait until March 30 to apply.
Perlego, which brands itself as the "Spotify of textbooks," has 14 employees eligible for this special status. However, founder and CEO Gauthier Van Malderen is grim about his hiring prospects in a post-Brexit environment. He's been able to hire educated developers, who want to come to London because it has one of the best startup ecosystems; he questions whether this will be true after the U.K. breaks away from the E.U.
Immigration to the U.K. dropped 6 percent from 2017 to 2018, according to the latest data from the U.K.'s Office for National Statistics.
Looking West for Growth
For businesses anticipating tariffs and currency fluctuations, the need to diversify their customer base is critical. Flavours Holidays is a Scotland-based tour operator that helps area travelers book activity vacations to Italian destinations like Tuscany and the Amalfi coast. Although the company's revenue grew 25 percent between 2017 and 2018 to 2 million ($2.6 million), founder Lorne Blyth worries people will put off non-essential traveling in an uncertain economic climate. Plus, as the pound loses value, which has been the case since the referendum, she's effectively paying more for services purchased in euros.
To limit the sting, Blyth is seeking opportunities outside the E.U. She attended the New York Times Travel Show in January to get insight into the U.S. market, for instance. "We are very actively marketing in the U.S.," Blyth says. "We are preparing a U.S. brochure for 2020 and working on specific tours for U.S. operators." She's predicting the U.S. expansion will boost revenue to 2.6 million ($3.4 million) in 2019.
Strang, of Wicked Vision, is also hoping the U.S. will serve as a growth market for his company--and despite his misgivings, he sees the business potential in a "no-deal" Brexit. "If there's no deal, the pound would weaken considerably, which can be a positive for us," says Strang, because prices will look increasingly attractive to overseas buyers. "I hate saying it. But if you have a commodity in the U.K., there's a huge upside to the devaluing."
"We have to look for the silver lining," Strang says. "Make the best of a bad situation."