Brexit: A valuation focus on how best to prepare and respond

Written by Yann Magnan, Lynne Weber & Rick Schwartz at Duff & Phelps

ALTHOUGH its full impact is unknown – or perhaps because its impact is so uncertain – Brexit poses immediate strategic challenges at several levels of a company.  Many observers are cautioning that it could take years for Brexit’s impacts to play out, and that an accurate prediction of its ramifications cannot be made at this time.

However, given the stakes involved, the lead time required for a company to plan and implement a strategy that takes Brexit-related risks into account, and the complexity of choosing the best course in the face of such uncertainty, companies will need to formulate their responses now, rather than wait until the outcomes are known.

Strategic challenges

Brexit poses strategic challenges at several levels of the organisation.  At the corporate level, key questions might include whether to relocate headquarters, restructure for tax or capital purposes, acquire within or diversify away from the UK, adjust future capital-raising, and re-prioritise across divisions to maximise profits in the new environment.

Within countries, strategies may need to be updated to modify the supply chain, diversify suppliers, attract and retain employees, and mitigate or take advantage of impacts of tax, tariff, and labour regulations on the company and its competitors.  Functional or business units will likely face issues such as where to locate R&D, whether to relocate manufacturing, which jurisdiction should have ownership of IP, and whether to renegotiate existing contracts or joint ventures.

Determining the best strategy, whether at the corporate, local, or functional level, is not an easy task when uncertainty is high. Good strategy means choosing the best path given these uncertainties, and knowing when to change course if necessary. But there are several challenges in finding the best strategy.

The first step to finding the best strategy evolution in response to Brexit is to identify, understand, and quantify the potential impact of new risks – and new opportunities – on the business.  Without a good understanding of how various future scenarios might affect your bottom line, your competitors and your suppliers, the formulation of any strategy lacks a solid foundation.  Moreover, the process for incorporating such risks and opportunities into the valuation of strategic alternatives must be streamlined; it must help decision-makers achieve consensus while not getting bogged down by over-analysis.

A well-structured, proven strategy valuation process

Robust financial projections and the valuing of strategic alternatives are all the more important during rapidly evolving, uncertain times.  The best way to overcome the challenge of strategy-making in the face of uncertainty is through a rigorous valuation process that helps to quantify risk and achieve consensus on the best path forward.  Hallmarks of a robust strategy valuation process are:

• Credible, well-supported financial projections even in highly dynamic and uncertain environments
• Valuation-focused analysis that supports comparison of diverse alternatives that vary in their risk profiles
• Ability to identify and value contingent (wait-and-see or try-and-adjust) decision strategies
• Flexible models equipped to consider wide-ranging alternatives and “what if” scenarios.

Step I avoids boiling the ocean by first identifying, then rapidly prioritizing and structuring the key risks, opportunities and strategy alternatives to be considered.

Step II is where deep expertise in risk quantification, development of financial projections, and valuation modelling becomes very important.  By leveraging the client’s existing plans, forecasts, and other data, and working closely with financial advisors and industry experts, one can develop a flexible financial projection model. These shall be equipped to address each of the strategies – including contingent strategies – and the impact of each of the potential scenarios and a further consideration of strategy alternatives by building in flexibility to adjust as future events unfold, in ways that increase the upsides and/or reduce the downsides.

Step III communicates the value-maximising response to these uncertainties.  Exercising the valuation under differing candidate strategies including business-as-usual, we determine each strategy’s value and risk profile.

A More Effective Strategy Valuation Process

Strategy-making efforts often stall when the team becomes overwhelmed by the complexity of the problem:  hard-to grasp uncertainties, too many options, conflicting objectives, and not enough time. Brexit poses challenges that are likely to equal or surpass any that a company may have dealt with before, and yet, there is an immediate need to overcome these challenges given the stakes involved.