Essential Factors to Consider During a Spinoff Transaction
A spinoff transaction occurs when a company creates a new independent company through sale or distribution of new shares of its existing business. Spinoff transaction leads to strategic benefits by enabling each business to focus on its operational strengths and avoid financial resource extension. Also, the parent company and the shareholders will enjoy a tax-free spinoff. If you own a company and serving its real business purpose, you can consider a spinoff to create shareholder value. It will help your company save tax and focus mainly on the core assets and business. Although spinoff transactions can be easy, they are not always successful. Poor planning and focusing on near-term prospects can lead to ill-fated long-term results for both companies. Therefore, for a successful spinoff and creating a long-term value, consider the factors below.
Consider the business purpose of the spinoff. Before considering a spinoff transaction for your company, understand why it is necessary. Spinoffs are known to increase the combined market value of the parent company and the subsidiary. When you spin off the subsidiary, the executives of the company will pay more attention and devote resources to the main operations of the company. The subsidiary spin-off will have officers who will make decisions without being limited by the company’s core business. Also, a spinoff transaction may be a way of attracting new investors to the parent company who will be interested in the new look of the business. Spinoff transaction leads to tax-free business for both separated companies. So, it is essential to understand your main aim for considering a spinoff transaction and its purpose for your business. It will help you make the right decisions in the spinoff process.
Consider the leadership. During a spinoff transaction, identifying the right leadership mix is essential. The leaders chosen will determine both the long-term and short-term results of separated companies. Choosing more leaders from the parent company should be considered. Dealing with staff who understands the vision of the companies will lead to their success. Companies that may consider choosing an outsider may have a low success rate because they have little or no familiarity with the business carried out. Therefore, for the separate companies to accomplish their mission, choose more executive members from the existing parent company and a few from the outside. It will determine how long the companies will take to establish their goals.
Also, prepare people for the change. After a spinoff transaction, every employee is affected by the changes. To ensure everyone adapts to the new changes positively, it is essential to inform them about it before the spinoff. Consider having a communication plan with the stakeholders to inform them of the spinoff rationale and the shareholder value creation for the management, staff, suppliers, customers, the market, and the investors. Ensure the objectives are addressed. Also, set targets and monitor the progress. It means preparing those involved in the process and giving them time to make timely decisions. Ensure you establish the right incentives to motivate and retain the staff and management. Preparing those involved for changes that will happen will make the process smooth.
