Separation process is a type of corporate reorganization that includes separating a section of the company and using it as the basis for the formation and incorporation of a new independent company or corporation, whereby all tasks assigned to this department and all associated assets and liabilities are transferred to the new branched or separate company.
(Spinout Company), which in turn becomes separate from the parent company and is able to complete its operational operations by following its specific strategies; it can also raise its own capital by issuing shares and securities.
The parent company is required to explain the details of the transfer and establishment process to the responsible authorities in a letter or form that includes all relevant information, which includes the reason for the dismissal process, the strengths and weaknesses of the new company or institution, the sector in which it will operate, and many others.
This separation and incorporation process takes a long period of up to six months, but it does not impose any fees or taxes on the shareholder.
Reasons for separation process
The dismissal process occurs for many and many reasons, perhaps the most important of which is the desire of the parent company to highlight the implicit value of one of its departments, as this department that the company wants to separate may be rapidly developing and growing compared to other departments. This separation process enables the department to prove its worth, capabilities, and qualifications and enables it to follow its own strategies that support its growth and development, and thus this separate section has greater opportunities to attract potential investors and other funders.
The reason behind the separation process may also be the establishment of auxiliary or additional services (ancillary services), such as the creation of technological programs or systems through which the parent company supports all its businesses and strategies and, in turn, enables it to achieve its goals and desires.
The separation process also occurs when the division is important but not sufficiently profitable, as is the case with the rest of the company’s divisions, as through this separation process, the parent company removes any source that distracts it from its main and important business.
Advantages of the separation process
- The separation process allows the parent company to focus on its main business without having to allocate its resources in order to meet the demands and needs of a specific department, whether in terms of managing operations, marketing, financing, or human resources.
- The separation process also allows the company to sell its assets or find another company that wants to merge with or acquire the new subsidiary.
- Through the separation process, the parent company provides the necessary support to the new subsidiary companies by purchasing property rights or signing contractual agreements in return for the supply of the required products or services. In many cases, the members of the management team of the new subsidiary company are members of the board of directors of the parent company.
Disadvantages of the separation process
Despite the many positives of the separation process, there are some negatives associated with it, perhaps the most prominent of which is the decrease in investors’ desire for the parent company after the separation process, which leads them to sell their shares in the company.
The separation process is also costly in many ways, as the parent company may take a great deal of time to complete the required procedures, and thus the company’s management diverts attention from its actual tasks represented in conducting its main business and operational operations and focuses on implementing activities and procedures related to the separation process.
The company may also incur significant financial costs in terms of planning and implementing the separation process on the ground. Finally, there is no guarantee that the subsidiary company will achieve profits, as this separate company may initially incur many losses or its profits may be very low without the help of the parent company, and the separation of the productive, successful, and profitable division may be attributable to the parent company due to its low realized returns. This, in turn, affects its financial performance.
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