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BREXIT | WHAT DOES GERBER THINK?

If you’ve been living under a rock and have yet to hear, the UK voted to leave the European Union on June 23. This semi-unexpected adjustment translates to meaningful implications, if you own a business.

When hiccups like this occur, take the opportunity to reevaluate your business. – Growth, partners, materials, debt, the whole shebang.

Here’s how Brexit can affect you, and your business.

IF YOU’RE BUYING GOODS AND SERVICES FROM THE UK, WHAT DO YOU DO?

If your business partners with companies in the EU for materials, we believe now is the time to buy.

An increase in revenue or a decrease in expenses translates into more profit for you. In this case, both can happen. Because you’re buying things overseas, in theory, your cost of goods sold is going to go down, which may increase your bottom line.

Point blank: If you routinely buy items from Europe as a whole, it can now cost less to do so.

IF YOU ARE BUYING GOODS & SERVICES FROM OTHER COUNTRIES IN THE EU DEPENDENT ON THE UK, WHAT DO YOU DO?

If you have a supplier that’s coming from the UK, you should think about doubling down on your volume due to the lower cost. But beware! The risk here is that European trade deals are not enforceable anymore. – Which will most likely not be sorted out for two years.

But, some companies have increased leverage.

Yes, U.S. companies can have increased leverage on their balance sheets and should require a higher risk premium. – In layman’s terms, there’s now a potential bigger risk to issue debt.

Consider this: Say your business sells material to Europe. Right now you could be delivering parts to Europe, and sending them a bill for those parts. What you don’t know, is that same European entity you’re selling to is now having financial implications due to Brexit, and your bill is the last thing on their minds. Yikes. Long story short, now is the time to cover your bases! Ensure those counterparts are financially viable enough to cover costs now, so your business doesn’t take on too much debt.

IF YOU HAVE FINANCING OR GROWTH CONSIDERATIONS THAT REQUIRE FINANCING, WHAT DO YOU DO?


Simple, take advantage.

If you’re looking to grow your business, now is the time to reevaluate. For financing purposes, the biggest consideration is interest rates. Rates are going to remain low, for the time being.

Similarly, if growth considerations weren’t on your mind already, they should be now. Reevaluate current debt sources and revisit refinancing debt.

Low rates are a double-edged impact for business owners: if you’re a business operating here in the states, the cost of borrowing is going to remain low for a longer period of time. In Europe, they will likely continue to have low interest rates as well – allowing them to borrow more.

FINAL THOUGHTS

As with all disruptive events, the capital market will sort itself out over time. From a business and planning perspective, maintaining 3–6 months’ worth of business expenses in cash is crucial. While we do not foresee a major collapse, having a cash cushion can prove useful in the event we do bump into a rough patch.

Think about employing a dollar cost averaging plan to invest cash regularly over the next few months. This systematic approach will allow you to take advantage of any potential short-term declines.


Still getting baffled by Brexit media headlines? Check out what some of the financial terms mean, below.

MARKET JARGON 101:
  • Pullback – usually a decline of 5% to 10% from recent highs
  • Correction – usually a decline of 10% to 20% from recent highs
  • Bear Market – usually a decline of 20% or more from recent highs
  • Rolling Return – the annualized average return for a period ending with the listed year
  • Dollar Cost Averaging Plan – a method of accumulating assets by purchasing a fixed dollar amount of securities, at regularly scheduled intervals, over a period of time (for example, $100 per month over the next five years). 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. All investing involves risk, including the possible loss of principal, and there can be no guarantee that any investing strategy will be successful. Any opinions are those of Randall Gerber and not necessarily those of Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.


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