When One Business Needs to Become Two: A Practical Guide to Demergers
Building a successful business does not always mean keeping everything together. Over time, one company may develop several different businesses. Shareholders may have different plans for the future.
One part of the business may be ready for sale while another is staying put. Or two businesses that once made sense together may simply work better apart. In those circumstances, a demerger may be worth considering.
The word sounds technical, but the basic idea is straightforward: taking a business or company out of an existing group and separating it, usually while some or all of the existing shareholders remain involved.
Why would you split a business?
There are many reasons. Imagine a company owns two successful businesses:
ABC Group
↙ Manufacturing Business
↘ Technology Business
They may have started together, but ten years later they are very different. They have different customers, different management teams and different plans for growth. One may need significant investment while the other generates steady profits.
At that point, keeping them together may no longer make commercial sense.
A demerger could allow the businesses to operate independently.
1. The shareholders want different things
This is one of the most practical uses of a demerger. Suppose two shareholders have built a group together. The group now contains two businesses.
One shareholder wants to concentrate on Business A. The other is more interested in Business B. Rather than one shareholder buying the other out of the entire group - or selling everything - it may be possible to separate the businesses.
The end result might be:
Shareholder 1
↓
Business A
and
Shareholder 2
↓
Business B
This can also arise in family businesses.Perhaps the next generation is coming into the company, but different family members want to run different parts of the business. Or succession planning means it would be better for particular businesses or assets to pass in different directions.
A demerger can sometimes provide a route to that separation.
2. You want to sell one business but keep another
A future sale is another common reason to consider a demerger. Imagine your group owns two businesses and a buyer approaches you about one of them. You are happy to sell - but only that business.
If both businesses are sitting together, you may need to separate them before the sale can happen. A demerger can potentially create two distinct businesses, allowing one to be retained while the other is prepared for sale.
That can make it much clearer what the buyer is acquiring and what the existing owners are keeping.
And, as with most restructurings, it is usually better to think about this before the sale process is well underway.
3. The businesses have different risks or funding needs
Two businesses under the same ownership can have very different profiles. One might be a mature, profitable business. The other might be a newer venture requiring substantial investment and carrying more commercial risk.
Keeping the two together may make it harder to raise finance, bring in investors or clearly assess how each business is performing. Separating them can allow each business to stand on its own.
That may give management greater focus and potentially make it easier to raise funding for one business without involving the other.
4. One business is being overshadowed by the other
Sometimes the problem is not risk or ownership. It is value. A profitable or fast-growing business can sit within a wider group where its performance is difficult to see separately.
Separating the businesses may give each a clearer identity and allow management, investors or potential buyers to assess them independently.
In other words, sometimes two good businesses can be worth more apart than they are together.
So, how does a demerger actually work?
This is where things become more technical. There is no single way to carry out a demerger. Depending on the circumstances, it might involve a statutory demerger, a capital reduction demerger or a liquidation demerger.
But for the business owner, that should not be the starting point.
The first question is not:
“Which type of demerger do we need?”
It is:
“What do we want everyone to own when this is finished?”
For example:
Who should own Business A?
Who should own Business B?
Should the existing shareholders continue to own both businesses?
Or should different shareholders take different businesses?
What happens to property?
Where should the cash sit?
What happens to existing borrowing?
Once the desired end result is clear, your legal and tax advisers can determine which route may be appropriate.
What actually needs to be separated?
Separating two businesses involves more than drawing a line through a group chart. Imagine Business A and Business B have operated together for years. They may share employees, premises, IT systems, customer contracts, intellectual property, banking facilities or insurance.
One company may own an asset used by both businesses. There may also be guarantees or borrowing arrangements covering the whole group.
Before the businesses can operate independently, you need to work through those connections.
That means asking practical questions such as:
Which employees belong with each business?
Who owns the property?
Which company should hold the intellectual property?
Are contracts used by one business or both?
Is any bank borrowing shared?
Are there guarantees between the companies?
Will one business need to continue providing services to the other for a period after the split?
A successful demerger is not simply about separating ownership.
The businesses themselves need to be capable of operating separately once the restructuring is complete.
What about property?
Property can be particularly important. Imagine a family group owns two trading businesses and the premises from which both operate.
If the shareholders are separating, who keeps the property?
Does it go with one business?
Should both businesses continue using it?
Will one business need a lease?
Should the property be dealt with separately?
These decisions need to be made as part of the wider planning exercise. The same applies to cash, investments and other assets that may not clearly belong to one business or the other.
Tax needs to be considered early
Tax is a major part of demerger planning. The way a demerger is structured can have tax consequences for both the companies and their shareholders, and the availability of tax reliefs can depend on the circumstances and purpose of the transaction.
Advance tax clearances may also be appropriate. That is why the tax position should be considered before the legal steps are put in motion.
A structure that achieves the desired legal result may not necessarily be the right structure once the tax consequences are taken into account.
The legal, tax and accounting advice therefore needs to work together.
A demerger takes planning
A demerger is rarely something that should be rushed. As well as deciding who owns what at the end, you may need to consider:
Valuations
Shareholder approvals
Third-party consents
Employees
Pensions
Banking arrangements
Transitional arrangements between the separated businesses.
The more connected the businesses are today, the more work may be needed to make them genuinely independent. That does not mean a demerger needs to be unnecessarily complicated.
It means the planning matters.
Is a demerger worth considering?
A demerger may be worth exploring if:
Your group contains businesses that would work better independently;
Different shareholders want to take different parts of the business forward;
You are planning to sell one business but retain another;
Different businesses have very different risks or funding requirements;
You want to give each business greater management focus;
Succession or estate planning means different assets or businesses need to go in different directions; or
The existing structure simply no longer reflects where the owners want to go.
The important thing is to start with the commercial outcome.
What should the business look like afterwards - and who should own what?
Once you can answer those questions, you can start working out how to get there.
How Daly McCormick can help
At Daly McCormick, we advise business owners and shareholders on demergers and wider corporate reorganisations, working alongside your accountants and tax advisers to ensure the legal structure supports the intended commercial and tax outcome.
Whether you are separating different businesses, planning for a sale, dealing with changing shareholder objectives or restructuring as part of succession planning. We can help you establish what the end result should look like – and put the steps in place to achieve it.
Your business. Our legal expertise.
Dungannon, Belfast, Omagh
02887441840
Disclaimer: The information provided here does not, and is not intended to, constitute legal advice. Instead, the information and content available are for general informational purposes only.
