Tax-free spin-off roadmap

Improving capital allocation, operations and investor focus

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Spin-offs are tax-efficient transactions that can create value through more focused capital allocation, improved operations and better alignment with investor preferences.

But in its operational, regulatory and strategic complexity, a tax-free spin-off is something of a three-headed beast: as demanding as any business carve-out, with added requirements akin to those of an IPO plus the close involvement of tax authorities and the Securities and Exchange Commission.

Considering the vast dispersion of returns that companies experience post-spin, read here about the most critical steps to completing a successful deal.

Spin roadmap timeline

Click on the interactive roadmap below for details on each worksteam.

EY - Interactive spin roadmap























Transaction governance

Establish a spin-off transaction governance model

  1. Define the spin-off game plan, form the transaction team and communicate objectives
  2. Communicate to stakeholders, including clearance story
  3. Set targets, delegate and monitor progress through reporting
  4. Define separation timeline and align work streams to key deadlines and milestones
  5. Companies should consider the appropriate role of SpinCo management – SpinCo management is typically involved in SpinCo organizational design and setting the strategic vision 
  6. The Board of Directors should have oversight and knowledge of key events through the entire process – there should be routine dialogue between the Board and management
EY - Transaction governance ×

Capital markets and structure

Capital structure

  1. Propose capital structure for each company based on its cash flow and growth profile
    • Review terms of outstanding debt; consider debt to target for exchanges and restructuring in order to minimize transaction costs
    • Determine how historical liabilities will be split (e.g., pension obligations)
    • Assess Day 1 cash requirements because the company’s existing cash may not be sufficient for working capital needs
  2. Forecast cash flow and develop a view of standalone costs
    • This information will be an input into the pro forma Form 10 disclosures and debt and equity roadshows
    • Helps determine interest and dividend payments available to the market
    • Determine one-time costs and who will pay in order to assess funding needs
  3. Determine which business will be retained (i.e., RemainCo) and which business will be distributed (i.e., SpinCo)
    • Legal and/or regulatory restrictions may limit asset/stock transfers
    • Distributing business with lower inherent tax gain may be preferred

    What’s being distributed

  4. Determine profile of the stock to be distributed (e.g., voting rights, distribution ratio, dividend policy)
    • Consider the distribution ratio and a reverse stock split if the anticipated share price is suboptimal
    • A split-off may benefit from a subsidiary IPO to set the market price, allowing for an exchange offer
  5. Develop the equity story for roadshows to garner sufficient market interest and avoid post-close sell-off


  1. Develop legal entity step plan
    • Mitigates potential business, operational, financial and tax impediments and costs
    • Legal entities with commingled operations, multiple non-US jurisdictions, and legal or regulatory restrictions on transferability of assets drive transaction complexity
    • Legal and/or regulatory restrictions may limit asset/stock transfers
  2. Determine tax basis, earnings and profits (E&P) and fair market value (FMV)
    • Appreciation (i.e., excess FMV over tax basis) of the existing businesses may drive the decision regarding the identity of RemainCo and SpinCo
    • RemainCo can generally “monetize” its investment in SpinCo to the extent of the tax basis in SpinCo stock
    • The FMVs govern allocation of tax basis and E&P (required for a dividend distribution)
  3. Refine proposed capital structure to optimize tax efficiencies
    • Allocating existing debt may result in an inefficient capital structure
    • May need to issue new debt to avoid tax costs of assuming existing debt
  4. Resolve intercompany agreements and settle accounts to prepare for legal separation
    • Necessary in order to achieve a complete separation
    • Impacts tax basis, value and debt capacity, and may influence the legal step plan
    • Develop scope and duration of Transition Services Agreements (TSAs), a tax-sharing agreement and other arrangements
    • Companies may not be able to operate completely independently immediately following the spin-off
  5. Develop the equity story for roadshows to garner sufficient market interest and avoid post-close sell-off
  6. Prepare supporting documentation for tax-free treatment
    • Contemporaneous support is generally required for tax-free treatment and future audits
    • A tax opinion is necessary in nearly all circumstances – the IRS does not generally issue private letter rulings (PLRs) pertaining to spin-off matters
    • If a company requests a PLR, the tax opinion may address only those matters not covered by the PLR
  7. Prepare public documentation and related disclosures (e.g., tax return disclosures, IRS Form 8937)
    • Required to ensure the company is compliant with IRS and other governmental disclosure requirements
EY - Tax ×

Financial reporting

  1. Invest time upfront to properly plan for preparing SEC-compliant historical carve-out financial statements
    • Timely completion of the audited carve-out financial statements (generally a four- to six-month process) is critical to achieve transaction timelines and being able to complete other financial reporting work streams (e.g., MD&A, pro forma financial information, credit rating agency/investor information, etc.)
    • Empower a project manager that understands SEC reporting requirements, sets interim milestones and globally aligns interdependent functions (e.g., management, tax, attorneys, bankers and auditors) in order to prepare carve-out financial statements and complete audits on time
    • Longer lead time items include basis of presentation, corporate cost allocations, push-down of certain assets and liabilities, historical SpinCo acquisitions, goodwill and intangible impairment testing and carve-out tax provisions
  2. Develop an IT solution that aggregates data, posts adjustments and supports statement preparation
    • Having one place to store all data for multiple outputs (e.g., audited and pro forma financial statements, rating agency financials, discontinued operations) can minimize version control issues, data problems and re-work
    • Align with tax to track and compile adjusted information at a granular enough level to enable carve-out tax provisions by jurisdiction
  3. Complete external audits of historical carve-out financial statements
    • Address basis of presentation matters as audited financial statements may not necessarily equal SpinCo deal basis
    • Involve auditors early and often to align on management conclusions and approaches to audit testing and support
    • Lower levels of materiality lead to unaccustomed depth of audit testing
  4. Compile pro forma financial information
    • Adjustments can include impact of new capital structure, impacts of various transaction agreements, asset/liability transfers, employee liabilities triggered upon sale and distribution, and ratio on earnings-per-share calculations
    • Do not underestimate effort required and potential stakeholder scrutiny of standalone and one-time cost disclosures
  5. Plan for SEC registration and review
    • Put forward your best effort into completing the initial Form 10 filing and initial comment letter response to avoid a prolonged review process
    • Understand anticipated timing for initial filing, SEC review process and amendments, reporting deadlines, holidays and “stale” dates
    • It can take four to five months (and four to five amendments) from initial Form 10 filing to SEC declaring your filing effective – important to adhere to publicly communicated timelines
    • Anticipate SEC hot-topic matters (e.g., revenue recognition, segments, executive compensation, MD&A)
  6. Anticipate post-spin reporting matters
    • Plan early as preparation for post-spin filings has to run concurrent to SpinCo’s SEC registration process
      • RemainCo may have numerous reporting requirements, including reporting SpinCo within discontinued operations and filing Form 8-K within four business days from spin date
      • SpinCo must file its first Form 10-Q for the quarter following the most recent period included in the Form 10 (later of 45 days after the effective date or the date the Form 10-Q would otherwise be due)
EY - Financial reporting ×

Operational separation

  1. Define the operating model of both companies
    • Understanding current state operations in detail is key to minimizing delays and cost overruns
    • Define the Day 1 and future state operating model, including employee allocation, and align it to post-spin strategic objectives
    • Right-size the organizations – an optimized future operating model can enhance deal value
  2. Determine level of separation on Day 1
    • Different transaction rationales call for different degrees of separation on Day 1 (e.g., short timeline, complexity to separate systems)
    • Regulatory bodies generally look for complete separation within two years (IT can be the exception)
    • A high degree of separation will accelerate the need to manage RemainCo’s stranded costs
  3. Define TSA requirements and governance model
    • Understand requirements and cost to deliver services on Day 1, as well as exit strategy
  4. Assess time required to establish new legal entities
    • Requirements to establish new legal entities vary by jurisdiction and industry and can take over a year to complete
    • Failure to act expediently can delay establishing bank accounts, contracting with vendors, configuring systems, establishing processes, selling product and other activities, and can delay closing
  5. Develop public-company governance and corporate infrastructure
    • Management and the board must be prepared for public-company responsibilities – e.g., they must be ready to file financial statements with the SEC post-close
    • SpinCo can set new corporate governance structure to eliminate legacy challenges
EY - Operational separation ×