In the dynamic world of business, bifurcation stands out as a strategic process that can redefine a company’s trajectory. It involves splitting a company into distinct entities, such as divisions or subsidiaries, to enhance focus, efficiency, and performance. While the advantages of bifurcation include increased agility, better resource allocation, and improved financial performance, it’s a strategy that requires careful consideration and expert execution, especially when it involves complex departments like IT, Accounting/Finance, Human Resources, and others. The process is laden with challenges requiring careful navigation to avoid pitfalls associated with poor planning, execution, and skills gaps.
Bifurcation: A Case Study
In late 2021, a private equity firm (“Sponsor”) acquired a distressed cleaning supply business and injected $30MM of working capital to address stretched payables. However, the Company encountered significant supply chain and production issues, leading to severe liquidity problems. Six months later, the same Sponsor doubled down by acquiring a second synergistic business. The Sponsor brought in multiple financial advisors to assist with executing a turnaround plan and integrating the businesses. By August 2023, the Sponsor relinquished control, and the Company’s lender became the new equity owner.
After the Company’s unsuccessful attempts to execute a turnaround plan, Getzler Henrich, a pioneer in the turnaround and restructuring space, stepped in. Leveraging its expertise to understand the objectives and sensitivities of all parties involved, Getzler Henrich helped the Company identify and implement actions to achieve optimal results for all constituents.
The initial task was to identify the root cause of the liquidity shortfall and curb the cash burn of approximately $2MM per week. Shortly after our engagement commenced, the CEO resigned, and Getzler Henrich assumed an interim leadership position. To create a viable go-forward business, we devised and led the bifurcation of the Company’s assets and liabilities.
The task involved developing a plan to bifurcate the companies across various domains such as Operations, IT, Accounting/Finance/Treasury, Human Resources, and more. This included divesting legacy assets and operations into a standalone company named OldCo and forming a new organization called NewCo. We also developed a detailed model for bifurcating assets, creating closing balance sheets for the old entity and opening balance sheets for the new entity. The process involved a detailed general ledger analysis, easing the transition for new legal entity structures, accounting, IT, and production. Twelve months later, the Company is now on a path to its first profitable year in over a decade, with healthy EBITDA results and cash reserves.
When to Consider Bifurcation
Leadership should ask some questions when considering bifurcation: Has the business reached a growth plateau? Are there distinct segments or divisions within the Company that perform significantly better or worse than others? What strategic approach will elevate the business to the next level? How would bifurcation align with our long-term business goals and vision? Are there inefficiencies in the current operations that could be resolved through bifurcation? What are the financial implications of bifurcation, including costs and potential revenue changes? Answering these questions can help determine whether bifurcation is the right strategy and how it might be effectively implemented.
Areas of Focus and Challenges
In the bifurcation process, IT plays a crucial role, extending beyond the division of systems to align technology with the strategic goals of each new entity. For instance, in manufacturing, the IT department must ensure that the technological infrastructure supports the unique production and operational demands post-split. This involves carefully managing the transition of shared systems to prevent disruptions in the manufacturing process, which could lead to production delays or logistical challenges. IT strategies must be meticulously crafted, considering the specific requirements of each entity. IT was critical in driving the changeover and ensuring overlap to facilitate a smooth transition and minimize operational and reporting disruptions. This included outlining strategies in a test database and conducting extensive testing to ensure system reliability and effectiveness.
Similarly, the accounting and finance departments face the challenging task of segregating financial records and systems. Underestimating the complexity of splitting financial assets and liabilities is a common pitfall. For instance, transferring equity and retained earnings from OldCo to NewCo involves intricate considerations. Questions arise: How is the debt treated? Is it converted to equity? What happens to retained earnings? What does the new equity structure look like for both companies? Developing a dynamic model to navigate these iterations and account assignments is essential. Without meticulous planning, entities may encounter compliance issues or financial discrepancies. Establishing proper Key Performance Indicators (KPIs) is crucial for monitoring financial health and performance post-bifurcation, ensuring alignment with the overall strategic goals.
Operational and production units aren’t immune to challenges either. The risk of losing efficiency and encountering supply chain disruptions is considerable, threatening the Company’s ability to meet customer demands and maintain its competitive position in the marketplace. Thorough planning is essential to sustain business continuity and minimize costly interruptions. Ensuring that production schedules align with inventory availability, maintaining strong relationships with vendors for reliable supply chains, and implementing contingency plans for potential disruptions are critical steps. Keeping a sharp focus on customer satisfaction is vital, as any delays or inefficiencies can erode customer confidence and loyalty. Thus, a strategic approach that emphasizes robust operational planning and effective supply chain management is crucial to preserving vendor and customer trust during the bifurcation process.
Human resources face the delicate task of managing employees during the transition, as neglecting employee sentiment can lead to decreased morale and productivity. Strategic communication and careful transition planning are paramount. Similarly, marketing and public relations must ensure clear, consistent messaging to maintain brand integrity and customer trust. Mixed messaging can erode confidence, making a robust strategy essential. Transparent and effective communication with customers and vendors is equally critical; any missteps can confuse and alienate these stakeholders, highlighting the need for proactive and clear communication strategies.
Conclusion and Recommendation
The successful execution of a bifurcation strategy not only avoids these pitfalls but also paves the way for unprecedented growth and innovation. It allows entities to specialize and respond more dynamically to market changes, potentially attracting investment and fostering innovation. However, an exit strategy is equally essential, outlining clear success or failure criteria and steps for potential divestiture if goals are not met.
While bifurcation offers a path to enhanced business performance, its success hinges on careful, detailed planning, skilled execution, and a comprehensive understanding of its growth opportunities. Companies contemplating this significant step should invest in capable management, define precise KPIs, and, most importantly, seek expert guidance to navigate the bifurcation process effectively. This strategic approach ensures that bifurcation can unlock the full potential of your business while mitigating the inherent risks.
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