What is Sell Off?
Sell off is one kind of divestment where one company sells part of its business to another company to mitigate the existing cash constraints . Company usually sale it assets to settle it’s urgent debts.
When a company sold off its entire part, its is considered as the extreme position of the company and through this entire sale a company gone into liquidation.
In a voluntary dissolution, the shareholder’s may decide to close the whole business and sell off all its assets and distribute net funds raised to shareholders.
Reasons for sell off
- Sell Off would be the strategic planning from the side of the management. A company may decide to restructure its particular part of business. Controls problems may be reduced if peripheral activities are sold off.
- When any unit making loss continuously, the management may decide to sell off that part of business so that profit may increase and management may get incentive for this.
- In order to protect the business from the takeover the whole part
- When a company suffers serious cash flow crisis
- When a subsidiary is considering as the high risk project to be sold to reduce the risk of the business.
- When a subsidiary could be sold at higher than this fair value.
However, a sell off could disrupt the rest of the business, especially if the key players within the organisation disappear as a result.
What is Spin Off?
Spin -off is the creation of a new company where the shareholders of original company own the shares. This is the process where a company creates new business entity and the company is separately listed in the stock exchange which has independent board of directors. The shareholders of a parent company receive a pro-rata distribution of stock in the newly formed company to their shareholding in the original parent.
Reasons for Spin Off
- Spin off reduces complexity and improves focus
- Spin off enhances new incentives
- Spin off reduce the conflict of interest
- Spin off helps to improves capital allocation
- Spin off close the valuation discount
- Spin off pursue separate growth opportunities.
Benefits of Spin Off
- No Changes in ownership i.e the shareholders now have shares in the two separate companies
- The spin off gives separate corporate identities and shareholders can choose whether they wish to realize their investment in one or other of the two business or remain shareholders.
- The spin off may avoid the conglomerate discount
- There may be improved efficiency and more streamlined management within the new structure.
However, company go for the spin off to manage the division which has good potential for the long term. In the spin off, the parent company transfer the assets, intellectual property i.e copyright, royalty, trademark etc. and manpower, to the newly formed company.
Documents needed for Spin Off/ Sells Off
There are numbers of documents are needed for spin off/sells off. Following documents are needed for spin off/sells off:
- Separation Agreement:
A “Separation agreement” is needed to allocate the assets and liabilities between spin Co. and Parent Co.
- Agreement regarding employee maters: Employee liabilities to be divided and requires employee commitments.
- Tax Matters Agreement: An agreement to be made regarding historic tax liabilities allocation.
- Litigation Matters Agreement: This agreement allocates the responsibilities for the litigation.
- Transition Services Agreement: This is the agreement which provides the post spin off services until the companies can separate fully.
- Intellectual Property matters agreement: This agreement contains gross licenses for intellectual property, potentially on only a transition basis.
- Other necessary commercial agreements (if necessary).
However, sells off usually exercise to support the organization when the company seriously suffers for cash flow crisis but the company needs to pay off its urgent debt. On other-hand, the management may decide to sells its loss making project make the parent company profitable and for getting the incentives against profit. Through spin off the parent company allocates the shares of subsidiaries to the existing shareholders in the form of special dividend where the shareholders is the owner of two companies. These divestment process is very popular in the group of companies.