In your search for an investment vehicle to grow your funds, you come across a video about a spin off company. The opportunity sounded appealing, but you wonder aloud, “how long does a spin off take?” The video continues and this is what you learn.
How Long Does a Spin Off Take?
A spin off can take as long as nine to eighteen months. However, this typical time frame is dependent on planning, initial preparation, regulatory and legal requirements, stakeholder communication, final approval, and post-spin off transition.
Spinning off a subsidiary or a division is a complex restructuring of a parent company and a management challenge to affect a smooth transition for the newly formed entity. The multiple processes involved are influenced by the inherent nuances of the businesses, internal managerial and operational processes and human capital management. Large spin offs may take longer and must grapple with economies of scale issues, multi-jurisdictional approval requirements, and a timeline affected by the erosion of market opportunities.
We address the question, how long does a spin off take? by exploring:
What is the Process of a Spin-Off?
Strategic Planning – The parent company’s board of directors and management team, along with financial and legal advisors, form a comprehensive, strategic plan to spin off a subsidiary or division. This, usually, is a one-to-three-month process.
Initial Preparation – Internal preparation is a three-to-six-month process in which the subsidiary’s financial and operational separation from the parent firm is encapsulated in a detailed plan. The restructuring is equipped with asset, liability, and debt allocations and fiscal forecasts for the new entity.
Regulatory Process – The parent company is required to prepare and submit a regulatory filing with the Securities and Exchange Commission (SEC). If the parent firm is US-based, Form 10 will be submitted. All applications must be reviewed, and any anti-trust and adverse competition concerns must be satisfied prior to approval and spin off consummation. The typical time frame is three to six months but can stretch longer due to the complexity of any regulatory issues.
Stakeholder Communication – The parent’s management team cannot be concerned with operational execution alone, they must also be informative and transparent with employees, clients, suppliers, banking institutions, and investors. How well the spin off is received is partially reliant on management’s effort to communicate a clear message. An effective communication campaign is a two-to-four-month commitment.
Final Approval and Implementation – Upon regulatory approval and with legal compliance assured, board and shareholder approval may be necessary. The spin off record and distribution dates are set and the subsidiary is financially and operationally separated from the parent firm. During this one-to-two-month period, all operational steps and legal requirements are solidified to ensure a smooth transition.
Post-Spin Off Transition – If the new independent entity requires continued financial support from the parent company, a Transitional Services Agreement (TSA) is exercised. The agreement is implemented to provide early-stage stability and monitoring to support eventual operational independence.
How long does a spin off take? A spin off timeline varies with the business and its size, management objectives, regulatory and legal hurdles, and market environment.
How Do You Know if a Spin-Off will Succeed?
You do not know if a spin off will succeed. There are certain key factors an investor must analyze to assess the spin off probability of success, and many are the foundation of the company spin off pros and cons. Here are the key assessment factors:
Strategy and Business Model – The spin off must have a clear strategy for generating revenue, increasing market penetration, and accessing capital.
Fiscal Health – Perform an objective analysis of the spin off financial statements. Look for strong revenue growth, positive net income, and low debt for economic downturn resiliency.
Management –Management is paramount. The spin off team’s expertise, experience, and track record are essential qualitative assessments you, as an investor, must know.
Market and Industry – Gauge the spin off success probability by assessing its growth potential, current market share, technology prowess, and regulatory climate.
Valuation – Determine the spin off intrinsic value and only consider the firm as a potential investment candidate if the enterprise value is greater.
Risk – Assess the potential challenges and risks the firm will face going forward. The risks must be identifiable, manageable, and survivable.
How long does a spin off take? The usual beginning-to-end spin off time frame is nine to eighteen months, however, anticipated challenges and unforeseen issues can extend the typical timeline.
Read next: 9 Successful Spin Off Companies You Should Know About
