Spin-offs have seen a resurgence in recent years. Many executives are finding that spinning a business into a stand-alone public entity can be a complex, but necessary, move to capture shareholder value.
There are many potential reasons. Some say that spin-offs unlock value from non-core businesses by improving management focus or by simply increasing transparency to investors. From a macro standpoint, a spin-off may provide a higher return than other opportunities in the current low-yield environment. And from a parent perspective, a spin-off may be part of a larger strategic or capital structure change such as debt paydown. Regardless of the reasons, it seems spin-offs are at the forefront of current market activity.
Preparing a business for a spin-off is a complex exercise. It is important to identify a project leader who is empowered to make critical decisions and navigate the organization through the process. The use of a project management group to prepare the separation plan, monitor progress, and identify gating issues can help keep the process on track. Early planning and identification of key resources is critical due to the multiple sets of financial information that may be needed, such as carve-out financial statements and proforma information.
The carve-out financial statements need to reflect all of the “costs of doing business” on a stand-alone basis. However, some of these costs may not have been incurred by, or historically charged to, the carve-out entity. Companies often encounter system limitations because information was not originally captured for this purpose. Areas that can create challenges include:
Successful spin-offs require management to be forward-looking, addressing not only the day-one issues, but also focusing on creating an entity that can thrive as a stand-alone public company. Key aspects of this include managing the talent transfer and performing a gap assessment, establishing corporate governance, implementing necessary systems and controls, assessing the capital structure and cash flow plan, readying the finance function for SEC compliance and preparing for investor relations activities. These activities are focused on the specific processes, systems, and staffing required to operate the new business in its future state. Transition services agreements are a common vehicle to smooth separation, but they cannot replace thorough planning.
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