This recovery won’t be like others; the business world has changed in fundamental ways. It’s likely that businesses will face several years of challenging conditions, while simultaneously adapting to a very different environment. So it makes sense to make sure that the business is as fit and well-prepared for what’s ahead.
That means starting with the basics, including corporate structure. Company structures I see everyday are unnecessarily complicated. It’s not surprising – when businesses grow, they tend to do it untidily, creating a corporate labyrinth. Acquisitions happen, complicated structures are set up for historic (and now long redundant) tax purposes and never dismantled, and the people who made the decisions move on with the corporate knowledge moving on with them. What’s left is complexity, redundancy and a lack of transparency. Who can honestly say that every entity in their group has a clear purpose and adds value?
Sorting this out through corporate simplification, at the best of times, is easy to put on the back burner for another day. It might be raised in the wake of an acquisition, but invariably there are more interesting things to tackle and so it’s pushed down the list. Good housekeeping like this isn’t exciting – but it’s very, very necessary.
Messy corporate structures cost money. Most executives have little idea how much their corporate structure costs them every year – but there are direct and indirect costs associated with every entity in a group, from tax compliance costs to data manipulation costs. Estimates vary but from the experience of our own clients, the financial savings associated with corporate simplification, for trading entities, can be as much as £50,000 per entity – and much more in a regulated sector. It has much in common with the 17th century windows tax – the more you have, the more you pay.
The pandemic has focused minds. Just as many of us turned to Joe Wicks during lockdown to help us get in shape, boards are recognising the benefits of corporate simplification, for a number of reasons:
Businesses with a streamlined structure are better prepared for transformation. People and operations can be matched with legal entities and the entire group is more transparent, simplifying decision making.
The more legal entities in a structure, the greater the governance and reporting requirements. The older the entities, the greater the risk of legacy claims and contingent liabilities presenting themselves, especially where there’s a lack of corporate memory.
Complicated legal frameworks slow down business transactions and tie up management time in compliance.
Simpler structures are easier to understand and more transparent – which means higher value if a deal is on the agenda. Recurrent costs savings from corporate simplification will increase EBITDA and send out the right messages to the market and to shareholders – we are deal ready.
Complex legal entities trap cash and capital – perhaps left over from previous trading, or retained to cover potential taxable gains and other liabilities when the people who put it there are long gone. What’s left is a corporate spaghetti of intercompany receivables, payables and undistributed capital.
Getting your house in order makes business sense – improving efficiency, trimming unnecessary costs and tightening governance processes – but it also acts as a catalyst for business improvements into the future. You can build back better if you start with the foundations. Our Corporate Simplification team has the right technology and specialist know-how to help simplify your structure both in the UK and globally, and uncover the biggest opportunity you didn’t know you had. For more details see our website or get in touch.