Using a demerger to strengthen your business in difficult times

Simon Wilson
16 March 2023

In challenging times, a demerger can be a useful way to help businesses survive, maximize value and be in good shape to capitalise on future growth opportunities. This article sets out examples of why you should consider this process in certain circumstances.

Reasons to demerge

Many businesses operate different activities and lines within the same company or group. However, for numerous reasons, it can be advantageous to separate these different activities. Some of these reasons are set out below:-

  • Ring-fencing loss-making business lines/assets

A good example would be a retail business that is struggling with its physical store trade but which has seen growth in its online sales. Such businesses might benefit from separating out the loss-making/less profitable store trade so that it does not impinge on the remainder of the business or the more successful online activities.

  • Increasing value of successful business lines

Using the same example above, the online trade may benefit from being in its own separate entity; by demerging it is often possible to achieve the full value potential of a successful business. A successful trade in its own ‘clean’ entity is also often a more attractive prospect to potential investors (facilitating growth) and to buyers, should a future sale or exit be in contemplation.

  • Allowing different activities to prosper without unnecessary regulatory constraint

As a result of global business pressures, some businesses have branched out into new and more profitable areas. For example, where one business line must abide by regulatory or financial constraints, this may place unnecessary burden on those parts of the business that would benefit from the freedom of being within their own entity or mini group. Businesses subject to financial regulation and strict capital requirements such as those within the insurance and banking industries, are obvious examples.

  • Separating a jointly owned business 

Demergers are often an efficient way of enabling business/joint venture partners to go their separate ways should they reach this stage in their journey. This may also facilitate succession and inheritance planning. A demerger can provide a neat method of separating business lines and/or assets between owners or joint venture partners.

  • Separating valuable investments and property

Many successful businesses have invested in real estate over the years. Given increased values over time, it might be that real estate assets have significant value, relative to the business itself. In such scenarios it can be financially advantageous and efficient (including from a commercial and tax perspective) to separate real estate from the original trade. This may also open up opportunities to separately develop real estate investments.

There are a variety of interesting legal methods that can be adopted to achieve a UK demerger and it’s important that you choose the right option as part of a planning process with the correct legal and tax advice. Once plans are complete, careful implementation is required in order to avoid unforeseen pitfalls. For example, implementing in a way which disrupts business, breaches third-party arrangements, has a negative impact on customer/client relations or causes unnecessary delay. All of which can be easily made mistakes for the unwary, inexperienced or ill-advised.

We are very experienced in overseeing and effecting a variety of demergers to avoid such traps for the unwary and to remove complexities. The success of a demerger often comes down to good planning, efficient project management and having the right legal and tax expertise on board from an early stage. If this can be achieved, then the benefits are often extremely attractive.

Businesses are having to think on their feet and be flexible, even more so now than ever before; demergers should be considered as a tool to assist with diversifying, getting ahead and potentially thriving.

If you’d like to explore how a demerger could help you and your business, please call or email Simon Wilson using the details below, for a complimentary initial 20-minute consultation to explore whether this is a good option for you; and if so, what your next steps should be.

Simon Wilson
Partner - Corporate
Simon Wilson is a Partner Solicitor at Spencer West. He specialises in Corporate transactions, reorganisations, investments, finance, shareholder arrangements and commercial contracts.