Why undertaking ’Brexit impact’ due diligence on a target company’s trading activities is vital in delivering deal value

05 May 2017

With Article 50 now triggered, businesses are increasingly focusing on the implications of Brexit on their trading activities. This includes looking closely at the potential impact on customs duties and supply chain management.

For many, the impact could include new and higher customs duty tariffs, and additional registration, systems, administrative and customs clearance costs. Further challenges range from potential delays in cross-border movement of raw materials, component parts and finished products to the implications for cash flow management of import VAT on goods coming in and out of the EU.

While certain sectors are likely to be affected more than others, a huge number of businesses will be impacted to at least some extent. This includes any business that moves raw materials or finished goods between the UK and the EU or between the UK and several other countries with which the EU has a free trade agreement.

Test of viability

What’s been especially striking for me from some of the reviews we’ve carried out is the effect on products and supply chains post-Brexit where major changes to those supply chains will be needed. While most of the media attention has been focused on movement of goods between the UK and EU, we could see just as big an impact on the cost of moving goods to and from several other countries we currently have free trade agreements with through our membership of the EU. These include major trading partners such as Mexico, South Korea and South Africa.

At the same time, these changes could be a catalyst for reaching into new markets and shifting supply and production to more cost-effective locations, which could possibly include more sourcing from within the UK.  

Transactions are continuing

How is the impending shake-up in trading arrangements affecting M&A? It will likely be close to two years before there’s an agreement and maybe even longer. In the meantime, plenty of investors and businesses are keen to pursue transactions and make informed decisions on potential transactions. Brexit itself could be a driver for acquisition, consolidation or divestment. There are also a lot of organisations that want to capitalise on favourable currency movements, along with financial buyers that are under pressure to put their ample funds to work. A key part of their deal evaluation is the potential implications of Brexit for valuations and future returns.

Ready for all scenarios

That’s why it’s so vital that any due diligence review of a target business should include the impact of Brexit on the group’s principal trading arrangements, along with other Brexit implications in areas such as regulation and labour. Clearly, a key part of this is assessing the implications of the various post-Brexit scenarios on costs, margins, cash flow and supply chain viability. Buyers can also identify opportunities for mitigation such as re-configuring supply chains or new distribution models, and then build these options into their overall deal appraisal and valuations.

For sellers, a Brexit impact assessment would assure buyers that the possible financial implications and opportunities for mitigation have been fully considered, and hence reduce any likelihood of a buyer over-estimating the potential impact.

Beyond the immediate need for due diligence, this analysis would also provide a useful foundation for strategic evaluation and planning on how to compete in a post-Brexit global marketplace. 

If you would like to discuss any of the issues raised in this article, please share your thoughts below or schedule a meeting.

Sanjay Shah |  M&A tax partner
Profile | Email |  +44 (0)20 7213 2611

 

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