There are many reasons why directors of private limited companies decide to split one company into two or more companies. Many will be owner-managed or family businesses that have grown such that different members are responsible for separate departments or types of business. As the business has grown, each may wish to take that department forward, separate from the other parts. Family members may have had disagreements as to how the business is run and wish to go their separate ways, taking with them the part of the business for which they have been responsible. A demerger may also be relevant as a precursor to selling one or more of the businesses, retaining the remainder. One area of the business may be a higher risk business and as such the whole would be better suited to separate legal entities. A demerger is also a way to split and separate the liabilities relevant to businesses owned by the company. Whatever the reasons, the aim will be to undertake the procedure as tax efficiently as possible for both company and shareholders alike, whilst at the same time ensuring that each company remains trading.
The risks one encounters while splitting a company are as follows:
1. Business Environment Uncertainty: Credit markets were tightening for the company’s debt refinancing, creating concerns about the timing of executing the split. Also, the EU data privacy laws required approval from the EU work councils to split the companies, so the team would have to work diligently to comply with evolving regulation.
2. Operating Model Definition: The organizational design for the two companies continued to evolve, with the creation and appointment of new C-level executive stakeholders. The target-state operating model was also in flux, as each of the new leaders evaluated how centralized or decentralized the future-state companies would be.
3. Employee Impacts: Initially, there was uncertainty for most corporate employees in the company. Which company would I work for? How would my role change? Where would I be physically located? With this uncertainty in the air, employee attrition during the project posed a material risk to meeting target deadlines.
4. Technology Target State: Standards and enterprise agreements for the technology infrastructure that included synergies for volume pricing would have to be restructured and renegotiated, potentially introducing increased cost to the new companies. And, as with all functions, there would now have to be two IT departments.
Thus, to avoid the risk and successfully split your company follow the following steps:
1. Establish a separation management office and steering committee: Splitting a company requires cross-functional collaboration and visibility at the strategic planning and execution level. Start by creating a Separation Management Office, consisting of senior functional leaders that will oversee the end-to-end split across HR & Organizational Design, Shared Services & Physical Location Structuring, IT, Financial Reporting, Treasury & Debt Financing, Tax & Legal Entity Restructuring, and Legal & Contracts. The Separation Management Office should report to a Steering Committee consisting of the Board of Directors, CEO, CFO, and other C-level leaders. When faced with difficult questions that require a decision to meet deadlines, the Steering Committee should serve as the ultimate escalation point and decision maker to break ties, even if it means a compromise.
2. Assemble the right project team: A split will require dedicated, skilled resources that understand the cross-functional complexities involved. This project team will need people that understand the interconnectedness of technology architecture, data, and processes, balanced with teams that can execute many detailed tasks. When forming the team, it is important to orient everyone on the common objective to create unity; departmental silos will not succeed. Variable capacity will almost certainly be necessary for major activities, and you may be able to stabilize your efforts by turning to trusted systems integrators or consulting partners to help guide the transition.
3. Sketch out the big-rocks project plan and manage risk: Agile evangelists often frown upon working under the heat of a mandated date and scope, but a public split force such constraints. Treat the constraints as your friend: Work backward to identify your critical operational and transactional deadlines. Ensure the cross-functional team is building in the necessary lead time, especially when financial regulations or audits are involved. Dedicate a budget, but be prepared to spend more than you anticipate, as there will always be surprises to which teams will have to adapt. As part of your project planning, create a risk management framework with your highest priority risks, impacts, and decision makers clearly outlined. When time is of the essence, contingency plans need to be in place to adapt quickly.
4. Prioritize speed over perfection: Any time a working system is disassembled, there unquestionably will be problems. The key is not to wait for a big bang at the end to see if what you have done has worked. Spending nine months planning for and three months executing this split would have introduced new risks. Instead, Subash and his team built their plan and then iteratively built, tested, and improved in an agile-delivery process. The team was able to identify isolated mistakes early and often, allowing them then to proceed to the following phases with greater confidence—not with bated breath.
5. Communicate relentlessly: In a split, every employee, contractor, supplier, or customer will be impacted. Create a communication plan for the different personas: Steering Committee, operational leaders, functional groups, customers, partners and suppliers, and individual employee contributors.
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