Demystifying the myths – should you declutter your business?
August 25, 2016
As mentioned in our previous blog “Decluttering your business; what stops you and should it?”, the UK corporate register grew to over 3.64m in 2015, a net increase of 245k entities in a year.
Incorporations are running at a faster pace and structures are becoming increasingly complex. Therefore, are you sure there is no harm in holding onto that spare entity? We explore the situations we have commonly encountered.
1) “Throwing the baby out with the bath water”
It's not unusual for a company's name to be associated with a well-known product or service, and understandably if this company is suggested for elimination groups might be fearful that value will be lost. This, therefore, becomes a great excuse for retaining a dormant entity.
How valid is this objection?
In our view not at all. If groups want to protect the goodwill associated with their products or services they should consider protecting that goodwill by registering the name as a trademark, or some other form of intellectual property (“IP”). Once registered - and title to the IP has been moved to another company in the group - the company can be eliminated without the risk of a competitor setting up a 'newco' with the same or similar name; to do so would give the owner of the IP the basis for a claim for infringement of title.
What about protecting 'unknown value'?
As product life cycles come to their natural end most patents or trademarks are likely to have lost any value that they once had. However, prior to a company’s elimination, checks should always be carried out to ensure there is no valuable IP located. If so steps can be taken to transfer the legal title of the IP to another group company.
2) “We may want to use the company again in the future”
Many times we hear directors say that they wish to retain a company because they feel they may want to use it again in the future. Does this really make commercial sense? Many of the surplus entities that clog up a group structure will have a certain risk associated with previous trade, financing and / or contractual arrangements.
Have you considered incorporating a new company (with no complicated history), and changing the company name?
A company name can be changed at any point prior to liquidation, as long as it’s registered at Companies House. This allows groups the opportunity to eliminate the entity in a manner that mitigates any associated risk; while leaving the group with a clean company to keep hold of the valuable good stuff for the future.
3) “This company is part of the family”
“The company was set up decades ago and was incorporated by my Grandfather’s cousin’s friend’s neighbour…. how can I eliminate it now?”
Holding on to surplus companies, particularly old ones, for sentimental reasons is a common challenge as to why a surplus entity is not eliminated. Sentimental reasons are often given where a company was once the main trader or brand name but has been dormant for a number of years. Many people question whether “There’s no harm in holding onto them?”
We don’t like to break sentimental hearts but we do like to save our clients unnecessary cost, and in our view holding onto companies such as these purely for sentimentality is a guaranteed way of suppressing a group’s bottom line.
The real intangible benefit of eliminating these is to help clear the skeletons from the closets of such companies which may have contingent liabilities arising from a by-gone era. Directors of these should ask themselves if they know what such companies have done in their long and often complex past. What contingent liabilities / issues may be lurking which could one day come back to bite the directors and / or the group? An appropriately executed elimination will not just save actual cost but will help minimise the group’s exposure from the risks that may lie beneath.
In our next blog we will continue to look at further reasons why company management believe they should not eliminate particular companies. If there are companies in your structure that the above points relate to and you would like some further advice then please contact us using the details below.
