Gregg Schor Featured in LIBN Article on Business Spin Offs
A whole is often better than the sum of its parts, but some business owners choose to roll the dice with the parts.
Lately there has been an uptick in shareholders opting, for various reasons, to spin-off part of their corporation, creating two separate companies. When a spin-off is done for a valid business reason and the parent company maintains an interest in both companies (and certain other conditions are met) it can be a tax-free transaction.
Spin-offs occur for a variety of reasons. As baby boomers age, parents in family businesses are stepping back as the next generation assumes control.
Even when a part of the business is spun off internally, third-party equity may be needed.
“The second company may need a whole new infrastructure,” said Gregg Schor, CEO of Protegrity Advisors, a Ronkonkoma-based merger and acquisition advisory firm that serves businesses with revenues ranging from $5 million to $100 million. “A lot of services like HR, finance and other administrative functions may have been shared between the two lines, and the second company may not be able to operate from the same offices or warehouse. There may not be budget dollars available to create a new infrastructure for whichever company is being spun off. They might look for a majority or minority investor.”
One of Schor’s services is advising companies about whether it would make sense to divest a part of their business to a third party.
“For a variety of reasons, one area of the business may be a drain on the others and may be holding the company back,” he said. “For instance, one of the business units may be more demanding on infrastructure or require more attention from management.”
In a recent divestiture, a company that had been in business for 50 years sold off the legacy part of the business.
“That’s how the company started, but in recent years it developed a related product line that has tremendous growth potential, and the family members saw a lot more potential in focusing on that part,” Schor said.
With the evolution in technology, many companies that started as brick-and-mortar businesses have put a greater focus on e-commerce, and that has been a catalyst for some to consider spinning off or divesting part of the business, Schor said.
“The divergence in the old way and the new way of doing business may come to a tipping point where it makes sense to split them,” he said.
Companies looking to sell off part of their business will find that there are plenty of buyers, Schor said.
“There are more buyers and more different types of buyers than ever before,” Schor said.
There was a time when private equity firms were only interested in very substantial purchases – in the billions or very high millions – but now there are all different types and sizes of private equity firms with interest in transactions at all levels, Schor said.
“We get about three blind calls a week from private equity firms looking to introduce themselves,” he said. “They say, ‘Here’s our deal criteria; let us know if you have any companies that fit.’”
In addition, “there are family offices who used to invest their money in private equity, but who now say, ‘Why don’t we acquire companies directly?’” Schor said.
Then there are “public and private companies who are having trouble growing organically, so they are looking to gain revenue, market share and talented employees through acquisition,” Schor said.
“There are a lot more entities looking to buy companies than there are quality companies to acquire, so it’s definitely a seller’s market,” he said.