Simplification in post-deal environments
February 09, 2017
In our latest in the series on corporate simplification we look at the myths around cost of resource, time and funds which stop businesses making the most of acquisitions.
“The liquidation process will take too long and will be a burden on our resources”
Myth: Liquidations take years to complete and therefore require plenty of client resources
A misconception among many of our clients is the timescale of the liquidation process. They worry that their resources won’t stretch to a drawn out entity reduction programme, which they believe may last up to 12 months, and that other agenda items require more focus.
Often, though, we find that many are resource constrained due to the statutory burden placed on them by maintaining entities that add no value, performing tasks such as preparing and filing statutory accounts and returns.
How long does a usual liquidation last then? In reality, the need for management input into the liquidation process can often be measured in weeks rather than months. Therefore, what can often seem like unnecessary short-term cost is usually outweighed by greater longer term savings.
“It doesn't represent value for money to the shareholders or enhance shareholder wealth”
Myth: Shareholders will disapprove of an expensive liquidation that does not provide them with an obvious short term return.
Many directors, particularly those within public companies, feel that expenditure which does not create the potential for a short term return is a cost that should be marginalised. The drive for immediate returns and efficiency is a primary concern for those who are largely accountable to their shareholders.
This is a completely sensible approach I hear you say…agreed, this is a sensible way to limit expenditure and maintain short term stability. Is this a sustainable model though if revenues begin to plateau? We believe that profits will be maintained more easily by cutting out the unnecessary cost from the business rather than consistently looking to increase revenues.
While a corporate simplification project may be a bigger one-time expense than the cost of keeping dormant companies open for another year, over time the administrative expenses can add up to significant sums, making corporate simplification look like a cheap solution. Even dormant companies with no assets can cost a firm money each year, with the recent legislative changes such as the introduction of the Persons of Significant Control Register only adding to these costs.
“It is more cost effective to roll forward accounts than to eliminate the companies?”
Myth: Rolling forward accounts/returns is the cheaper option to an elimination programme.
For a dormant company, whose accounts remain the same from one year to the next, I can understand there is an argument for rolling forward accounts. Many groups though decide to ignore the intangible costs associated with this, which lies in the management/director time that is required to sign off the statutory accounts and returns that need to be filed.
It surely can’t cost that much to sign a few forms...from conversations with our clients the estimated annual cost of holding a dormant entity is between £3,000-£5,000. This is based on the time and resources required from staff, management and directors to complete the statutory duties. These annual costs will then continue to increase for active entities.
In our experience, the payback period for an elimination programme can be as little as 12 months in some cases. In the longer term eliminations can therefore be significantly more cost effective than rolling forward accounts and returns, especially for acquisitive groups who are continually adding to their structure.
Have these myths been your reality? If you would like further advice then please contact the team using the details below.