Financially preparing for a spinoff
Creating a spinoff can be a long and complex process. Preparing ahead of time can help things go smoothly. Here are a few key steps to consider taking.
Compile stand-alone financials for the spinoff company. This could include creating balance sheets, statements on income and cash flow, forecasts for future financial performance, and an analysis of working capital needs.
Determine the best capital structure for both companies. Consider the debt allocation between the two entities as well as how much cash and liquidity will be required. Also, assess the need for new debt or equity financing that might be required to execute the spinoff.
Set up independent processes for the spinoff company. Ensure the new venture is equipped to stand on its own by implementing financial systems and processes, such as a new enterprise resource planning (ERP) platform, treasury and cash management functions, and financial reporting capabilities.
Allocate resources between both companies. Create a plan for which assets and liabilities will transfer to the spinoff. This could include intellectual property rights, real estate and equipment, contracts and agreements, and pension and benefit obligations.
Draft a detailed transition plan. This agreement should include details like what ongoing financial support, if any, the parent company will provide and any shared services that will remain between the companies.
Budget your money—and your time. Plan for one-time costs that will be associated with the spinoff, such as legal fees, consulting expenses, and IT investments. Preparation takes time, so consider factoring in backup resources for the periods when leaders will be focused on the spinoff, too.
Challenges facing newly created companies
Going from a division of a parent company to an independent entity can be like transitioning from the established stage to the early stage of the business lifecycle overnight. That’s why the preparation that comes before the spinoff is so important. Setting up independent processes in advance can go a long way in alleviating the challenges a new company might face.
As the spinoff gets off the ground, leaders may need help with:
- Recruiting new employees and retaining key talent from the parent company
- Securing access to capital to fund future growth
- Developing an independent strategy and brand identity
- Attracting investor interest
Something else to keep in mind: Private businesses conducting spinoffs will face a different valuation process and regulatory requirements than public companies, for which the transaction involves distributing shares of the new venture among shareholders of the parent company.
Sale: Selling a business unit outright to a new buyer can be less complex than a spinoff.
Split-off: This transaction allows stockholders to choose whether to hold shares in the parent company, the subsidiary, or both.
Carve-out: The parent company carves out a portion of itself to create a new publicly traded company through an initial public offering (IPO).
Your Truist relationship manager can talk through the options with you and connect you with resources across the bank to help with the transaction if a spinoff is right for you.
