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FX impact and Manufacturing

In the days since Brexit one of the most constant themes we deal with when working with clients in the manufacturing space is the impact of FX on their profitability and how that will be viewed by purchasers and investors.

Against the dollar the pound fell as low as 1.20 after the vote to leave the EU and has slowly climbed to open the year at 1.35 and in the last week has climbed again to 1.42 today. For context, immediately pre-Brexit the rate was 1.48. However, the story against the euro is very different, with the rate today and for the last year largely consistent at 1.15. This would indicate that we are seeing a weakening of the dollar rather than a general strengthening of the pound.

FX volatility is unhelpful to manufacturers in numerous ways, particularly when you need to forward order large volumes of foreign currency denominated raw materials or have significant other non-GBP dominated input costs and have a sales profile with limited natural hedging.

This can be more problematic still in an M&A environment, where buyers frequently will seek to treat any FX gain as 'extraordinary' but will treat FX losses as an inherit risk of the business model. A truly one-sided bet.

There are multiple ways that the FX impact on a manufacturing company can be positioned to defend against this approach and to highlight the true profitability and growth of a business, such as presenting all of the financials on a constant currency basis. Businesses with considered hedging strategies also limit their exposure.

Another area we frequently look at in preparing our client's businesses for sale is the likely buyers' currency. If your business buys dollar-denominated inputs and sells significantly in dollars you may see this as a dollar exposure in your business. For a US buyer however, it is a pound exposure they are acquiring: your UK cost base. The FX exposure in your dollar input costs and export sales already align with the rest of their business. This can have significant impact on how you present your business. Should you present your financials on a dollar basis? As a minimum you should understand what this looks like to see how your buyers will look at the business.

If you want to discuss managing FX exposure in your business or how to avoid it impacting how buyers, funders or investors will view your business please give us a call or an email.

Graham Carberry

Managing Director

Phone: +44 20 7484 4728

Mobile: +44 7855 466430