Companies Can Improve Their Bottom Lines with a Spin-Off

Slimming Down

Companies Can Improve Their Bottom Lines with a Spin-Off

If your company suffers from growing pains or anticipates a hard stretch due to the current economic climate, you may want to consider a spin-off. Spinning off a business or unit can provide a variety of benefits, such as yielding much-needed cash, removing poorer-performing entities from your balance sheet and freeing up management to concentrate on your core business or pursue more profitable initiatives. To effectively grow your company, in fact, you may need to first scale back.

Several Forms

Spin-offs can take many forms and are accomplished in various degrees. A unit may be fully divested of its parent and become an independent, publicly owned entity. Or it may merely become a subsidiary of the original company, gaining owners but still being run by the same management.

Whatever the spin-off form a company adopts, a wholly owned segment of a larger company becomes a fully or partially independent business. Most often, the divested company’s shares are offered in the public marketplace.

Staging the Transaction

Spin-offs involve several stages, the first – and one of the most critical – being the “pre-spin” period. This is when a company prepares a division to be spun off and announces its intentions to the public. During this period, the company will work with the IRS and SEC to ensure the proposed deal meets all tax and regulatory requirements. The company also must gain its board of directors’ final approval.

From here, spin-offs generally are executed in one of two ways:

  1. Pure spin-offs. This is when the parent company distributes 100% of its ownership of a subsidiary operation as a dividend to current shareholders. After the spin-off is complete, there are two separate public companies. Shareholders have the option of selling their holdings in the new entity, if desired.
  2. Partial spin-offs. Here, the parent company sells an interest of less than 20% in the subsidiary in an SEC-registered initial public offering. This method often appeals to companies that need to raise capital but want to maintain ownership of their subsidiary or shine a spotlight on an undervalued division.

Which type of spin-off a company should pursue primarily depends on its long-term goals. A partial spin-off, for instance, may be a better choice for a division that’s not yet ready to stand on its own but that a parent company nevertheless believes the market has undervalued. Spinning off part of the division could enhance its value for an eventual sale or pure spin-off.

Why Do It?

Spin-offs have long been a popular and successful way for companies to improve their bottom lines and streamline strategic plans. As of this writing, General Electric, for example, is in the process of spinning off its 101-year-old, low-growth appliance business, planning either to sell it outright or accept outside investors in a strategic partnership.

Companies spin off divisions for many reasons. A company may need to raise cash for capital-intensive projects. Similarly, a unit’s elimination could improve the parent company’s credit rating and make it a more attractive loan candidate. Some companies even enjoy tax benefits from a spin-off.

Government regulators may require a public company to remove a division if it’s considering a merger with a competitor. For example, the Federal Trade Commission might ask merging companies to divest similar businesses that could, if joined, enjoy too large a market share.

Sometimes spin-offs are accomplished for strategic reasons. A company might spin off a healthy entity with strong growth prospects to gain greater investor attention. Say, for example, that a company has a promising software division that’s undervalued because its parent company isn’t well known in the software sector. If that division is put up for sale and no longer buried in a larger company’s basement, it could receive the market attention it deserves.

Finally, a unit could be a poor performer that has become a drag on the parent company’s earnings. Selling troubled units can be challenging, however. To compensate for additional buyer’s risk, you may need to retain an equity stake in the division or provide financing for the seller.

Benefit of Separation

Whether your company is undercapitalized and looking for cash with which to pursue new markets or make business acquisitions, or you simply believe that a current division could be more competitive as a separate company, consider a spin-off. Separations can be painful, and they require some time and expense. But the benefits can more than make up for the trouble. ______________________________________________________

Ensure Your Spin-Off Isn’t Taxing

One advantage of spinning off a subsidiary is the potential for major tax savings. Although, selling a subsidiary outright typically means that your company will pay substantial capital gains taxes, tax professionals can help you structure the transaction to minimize the burden.

The key is to comply with Internal Revenue Code Section 355, which requires a spin-off company to have existed as a subsidiary for at least five years. It also demands that:

  • The spin-off be undertaken for “a real and substantial non-federal tax purpose” and not just to dodge the IRS;
  • Before the spin-off is conducted, the parent company own at least 80% of the total combined voting power and 80% of each class of nonvoting stock of the subsidiary;
  • Both parent and subsidiary be involved in what the IRS terms an “active” business immediately after the spin-off, and
  • At least one shareholder of the parent company retains a minimum 50% equity interest in the spin-off.

If you spin-off doesn’t conform to Sec. 355, your company could be held liable for the full tax obligation on the divestiture. Meanwhile, your shareholders could be taxed as if they had received a dividend. _______________________________________________________________

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Keys to Negotiating a Successful M&A Deal

Keys to Negotiating a Successful M&A Deal  Whether you’re buying or selling a business, a few guidelines can help you negotiate a deal more effectively and improve your chances for an advantageous outcome. While you’re probably already familiar with basic negotiation strategies, most parties to an M&A transaction can use a refresher course when it comes to what may be the biggest deal of their lives.

Know Yourself

Good negotiators start by knowing themselves. Before you enter into sale negotiations, take time to identify your goals and your tactics for achieving them. If you’re buying, what’s your “reservation price”-the most you’re willing to pay? Would you be able to walk away from the deal if the seller refuses to budge on price?

If you’re selling, similar questions apply:

  • What’s the lowest offer you’ll accept?
  • Are you in a hurry to sell?
  • What conditions will you require as part of the sale?

For example, the retention of certain employees may be a priority. Also be prepared to speak confidently about your business’ strengths and address any perceived weaknesses. Since the buyer’s negotiating leverage emphasizes your weaknesses, you need to be aware of them and ready to provide a solution that mitigates an adverse effect on the buyer’s offering price.

Know the Other Party

Knowing the other side is as important as understanding your own priorities. This knowledge allows you to map out the negotiation ahead of time. As a buyer, you should have a thorough understanding of the business-gained through extensive due diligence.

If you’re a seller, it’s essential to know that your buyer can afford to purchase the business and, if the deal will be seller-financed, how well the company will be run while the note is being paid off. It’s also helpful to learn if your buyer has looked at many other businesses. Buyers who know they have other options if your deal falls through will probably drive a harder bargain.

Gathering knowledge involves more than research; you also need to be a good listener.

If you’re talkative by nature, make an effort to speak less and listen more when meeting with the other party. The better you understand them, the greater chance you have of anticipating their moves and preparing counter offers.

Build a Relationship

There are plenty of opportunities for differences of opinion in any business transaction, and a business sale is no different. Establishing a cordial relationship can go a long way toward reducing misunderstandings or unintended offenses. Social occasions such as dinner or a golf outing can break the ice. Expressing interest in the other party’s opinion and a sense of humor also can help build a good working relationship.

Going back on your word, exaggerating points or misrepresenting facts in an attempt to strengthen your position, on the other hand, can damage goodwill. Finally, don’t try to box the other party into an untenable position-it’s a tactic that’s likely to misfire.

Flexible is Vital

Selling a business is a complicated process, of which price is only one component. When entering the negotiation stage, keep in mind other items that are subject to bargaining:

  • Down payment amount;
  • Interest rate on a seller loan;
  • Collateral;
  • Seller warranties;
  • Earn-out provisions;
  • Non-compete agreements.

Also consider the structure of the deal-whether the company’s stock is being acquired, or just its assets. In general, sellers prefer a stock sale and buyers prefer an asset transaction, which provides better cash flow after the deal.

Good negotiators take advantage of the multifaceted nature of the process by remaining flexible throughout. This may mean compromising on some elements to get the ones that are most important to you, such as those related to financing terms, the closing date, employee retention or seller warranties.

With so many moving parts to consider, flexibility can get you past obstacles. If you’re hung up on a tough issue-say, the price of a particular asset-try putting it aside temporarily, moving to less controversial points such as the price of other assets, and then circling back later.

Dream Team

Join the VR team as a franchisee and serve the lower mid-market
as an M&A specialist

VR Business Broker Teamknowledgeable and experienced M&A deal team can help facilitate and streamline the business sale process-from due diligence to negotiations to the execution of agreements and other post deal transactions. Becoming a VR Franchisee affords you the opportunity to assist sellers of privately held lower mid-market companies to successfully navigate the selling process and put together a winning dream team that can produce a win-win outcome for all parties.


Choose members wisely

Some of the most important decisions you’ll make in the process concern selecting professionals to help with your M&A deal.  A deal team may consist of financial and
legal experts or you may need to expand the team to include – depending on the
size and scope of the deal and your industry-specialists from fields such as
government and environmental regulation, human resources, risk management,
information technology, and operations. As a VR Intermediary, you will lead the
team, helping to organize and package information from all certifiable sources and
further negotiate the deal.

Your seller’s current legal and accounting advisors may be able to serve on
your deal team and recommend M&A experts to work with you. When evaluating
potential advisors, you will want to consider such factors as their:

  • Experience with transactions similar to yours in terms of size and industry,
  • Success rate with previous clients,
  • Number of engagements handled per year, and
  • Professional affiliations.

Guide your team

Because of increased concerns about fraud, financial misrepresentations
and the profitability of consolidation, many buyers have intensified their due
diligence and are demanding a more qualitative analysis of an acquisition
target. They will be ready to devote time to the information-gathering and
negotiation process.

As your seller comes under intense scrutiny, your team needs to be in place as
early in the process as possible to enhance the value of your seller’s assets
and prepare to support the company’s credibility. Any significant surprises
uncovered by a buyer during the due diligence phase will almost certainly lead
to a reduced offer.

Ensuring that team members understand the goals of a deal is critical. Buyers
need to articulate their consolidation objectives-for example, whether theirs
is a financial or strategic acquisition-and which of the target’s assets are of
greatest interest. Sellers need to communicate their selling price goals and
unique value drivers and outline other issues, such as the protection of
intellectual property and financial information.

Without clear guidance, conflicting views and opinions from the buyer and
seller will affect the outcome of the deal. You, as a trained VR professional
can avoid this by assigning tasks to specific individuals, based on their areas
of expertise. You may end of leading both sellers and buyers into forming
separate  due diligence committees. Comprising company executives and select deal team advisors, you will lead the committee to meet regularly to review the status and progress of the due diligence process.

Know your purchase agreement

Buyer and seller deal teams also will be instrumental during the negotiation process. The teams can help outline the structure of the deal, purchase price, financial terms, integration and any potential “deal killers.”

Once the parties have come to an agreement, your VR deal team will review the
purchase agreement’s terms and conditions along with the seller’s professional
advisors. For example, the team may work through actual conditions that may
arise and run model purchase price adjustments using anticipated inputs, such
as how current assets and current liabilities are defined.

As the team anchor, you  must be prepared to suggest additional stipulations into the purchase agreement to solve issues that will affect the final purchase price, such as a valuation of a piece of intellectual property. Once the purchase agreement is signed, your job as a professional VR Intermediary will continue to work together through any regulatory consent processes and assist, as necessary, with the process of merging finances, operations and other systems. Your VR team will also be
instrumental in ensuring that the terms of the transaction are carried out and
a “time is of the essence” closing event occurs.

Start building yours

The process of buying or selling can create tremendous pressure on buyers and sellers of privately held businesses. As a VR Franchisee, your job is to help ease and manage those pressures to a successful closing event.  Helping buyers and sellers achieve their goal and transition to the next phase of their life is a high calling.  Becoming a VR Franchise is not for everyone.  But for the few who select to go down that road, there are few professions that are as rewarding as assisting buyers and sellers in fulfilling their dreams and ambitions.

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VR Waukesha, Wisconsin Closes Two Transactions Valued at 7.7M

VR Business Sales | Mergers & Acquisitions, the leading business brokerage and mergers and acquisitions company in the world announced  today that the VR office located in Waukesha, WI has completed facilitating two unrelated transactions worth over $7.7M of market value.
The first transaction, valued at $3.7M was concerning a metal fabrication company and involved a recapitalization. The second larger transaction came about rapidly after a Private  Equity Group took interest in a manufacturer of Skid Steer Attachments and negotiations settled on a $4.4M price tag.

Mergers & Acquisitions by VR Business Brokers

VR Mergers & Acquisitions (VR M&A) specializes in handling merger, acquisition and divestiture services for the mid-market company. VR M&A is committed to providing the best intermediary service with the goal of serving every client professionally and confidentially.

Our area of expertise is providing transaction services for privately owned and closely held companies. VR M&A assists in all phases of the transaction, linking initial analysis, planning, valuation, marketing, qualification of prospective purchasers, negotiation, due diligence and ongoing interaction until the transaction is successfully closed. When selling a company through VR M&A, mid-market business owners follow a structured and proven process.

VR M&A represents companies in a wide variety of industries. Our broad range of knowledge provides the ability to assist the seller in preparing the company for sale and assisting an orderly transition of management.

VR M&A works with your management and your outside professionals to provide practical advice on succession planning, business valuation, industry specifics, area economic issues, and financing methods and resources. By providing thorough assistance before, during and after the sale we assure our buyers and sellers of the greatest possible opportunity for success.

VR M&A develops a complete program within the framework of a confidential business profile to market the business. This includes a customized marketing package designed to professionally attract, interact, and inform today’s sophisticated buyer. The ultimate goal is to plan and implement a profitable exit plan for the business owner.

We would welcome the opportunity to put our resources and expertise to work for you. Please call us at the number below and let us know how we can help you achieve your business sale, merger or acquisition objectives.

VR M&A Services Include:

  • Divestitures / Seller Representation
  • Acquisitions / Buyer Representation
  • Succession Planning
  • Value Enhancement Consulting

If you might be interested in handling Merger & Acquisition transactions as a new career or business opportunity you can become a VR franchise owner.

VR Franchise owners are highly trained in all facets of business sales including larger transactions involving mergers and acquisitions.

For more information about this unique and specialized opportunity please contact VR headquarters at 1.800.377.8722