When ‘divorce’ can save a business

Business “marriages” in the form of mergers and acquisitions can be a natural progression for growing enterprising, particularly during boom times.

But what happens when things aren’t going so well and a business relationship hits the rocks? Michael Watts, Corporate Finance Partner at Haslers, demystifies demergers.

The recession of the last couple of years, and the current economic cycle, are bringing new pressures on business and confidence, with some shareholders simply looking to batten down the hatches and ride out the storm while others are prepared to take significant, risky decisions.

However, we have also seen a number of cases over the last few years where the owner-managers are deadlocked or at loggerheads and are unable to come to decisions about the future strategy of the company.

In the absence of a shareholders’ agreement – which should be in place for any company – it falls on the owners to resolve the issue amongst themselves, which in stressful economic times can lead to greater heartache and disagreement.

So what can you do if you reach this position? The best option may be a demerger and we have dealt with a number of these over the last few years, all of which have been implemented for the reasons outlined above.

There are a number of ways to achieve a demerger and the circumstances of each situation need to be considered carefully, as there are likely to be a number of complex tax issues involved.

Alongside the tax issues, there will be a whole raft of commercial issues that also need to be thoroughly gone into: property, employees, restrictive covenants, valuations (of separate divisions, for example), fixed assets, clients…the list goes on.

There can be a great deal of emotion involved in agreeing the terms of a demerger between the parties involved.  Some would say the process is very similar to a divorce, but in the long run, if the business relationship has broken down, a demerger can save the business and any value the shareholders have built up.

The likely alternative in a continued stalemate is that the business is unable to move forward, stagnates and ends up in a downward spiral, which eventually leads to its downfall, in which no-one receives any return for their hard work and investment and possibly losses personally if there are personal guarantees or other forms of security in place..

From our own experience, in the cases we have advised on demergers have left the owners able to concentrate on taking their business forward, rather than being distracted by ongoing infighting.  As such, a demerger is certainly an alternative to a buyout and is always worth considering in such a scenario.

For more information, please contact us.