The tax implications CFOs should consider when divesting a business unit
Executing and achieving Day Two readiness to not only protect value but also create it
Tax and finance leaders must have a good grasp of a corporate carve-out’s implications for operations and business models to develop the most effective business structure. An article by Harvard Business Review and Deloitte outlines why Day Two needs to be planned from the very start.
What is a corporate carve-out?
A “corporate carve-out” is a corporate reorganisation method in which a parent company divests a business unit—the overwhelming focus for the management team is on execution and achieving Day One readiness. While execution is certainly key, “not destroying value” is very different from “creating value.”
One way CFOs can create more value for their businesses during a corporate carve-out is by intentionally working with tax and finance leaders to design Day Two from the start.
What are the tax implications of a corporate carve-out?
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There can be massive tax implications of a corporate carve-out, not just in how the new company (“NewCo”) is structured, but also in how it will operate. New service agreements, supplier contracts, facilities and business models have tax impacts. Splitting a company very often changes the realities of the business. An organisation might find that the allocation of its taxable profits shifts because of changes to the centres of activity, where the decision-makers for the NewCo sit or where capital is invested. The same goes for the remaining part of the company (“RemainCo”). For example, if your tax calculations were based on certain research and development (R&D) incentives and you are now carving out your R&D division, your tax assumptions will clearly change.
Tax and finance leaders must have a good grasp of the corporate carve-out’s implications for operations and business models to develop the most effective business structure. So, from the very start of the execution process, they must understand what Day Two will look like.
Bring Day Two planning to the forefront
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By focusing too much on Day One readiness, businesses might miss an opportunity to create the right environment for the success of both organisations. Planning for business after the corporate carve-out allows tax leaders to provide better advice to CFOs on how the future businesses should be structured. And that can improve both financial value and business flexibility. Day Two planning is about aligning the business structure and profit profile to ensure the NewCo is maximising its potential tax benefit. It is also about creating greater flexibility for both the NewCo and the RemainCo, because the business environment will continue to change after the corporate carve-out.
What are the benefits of Day Two planning?
There are many reasons why CFOs and tax leaders should not delay thinking about Day Two. Perhaps the biggest is that planning for Day Two directly influences the financing that the deal can attract and the sources of financing will have a direct effect on how the deal gets financed. At the same time, tax operating models will also shift. Corporate carve-outs can provide a blank sheet on which to design the optimal tax operating model for both the NewCo and the RemainCo.
Preparing a corporate carve-out is difficult work. And many times, tax and finance leaders may be missing out on opportunities—not just to protect value but also to create it.
How Deloitte can help
Deloitte offers differentiated solutions to help companies identify M&An opportunities, assess risks and exposures, understand the tax synergies that can be captured in transactions and deploy offensive and defensive M&A strategies to navigate uncertainty and rebuild profitability. To learn more about how Deloitte can provide tax and legal support to your organisation throughout the deal lifecycle, explore Mergers & Acquisitions.
Are you ready?
