Asset-light lessons learned from the field: a high value conversation

It is no secret that companies need to reset, rethink, and revitalise their business in order to become profitable in the new normal that they face.

I have been keeping a close eye on this and it is interesting to see what form these transformations take.

Massive questions
One of the biggest questions that companies need to ask is: what is the right strategy for my business?

Once thought of as a defensive tactic, I recently read an article by Ernst & Young which points out that an asset light business model is becoming increasingly popular once again.

For companies undergoing an asset-light review and transformation, developing consensus and buy-in among key internal participants can be challenging.

“In my experience, there’s often tension within companies when undergoing an asset-light assessment. For some people, this is a controversial subject. It’s sometimes viewed internally as a defensive move — a way to cut costs and drive earnings quickly. In reality, this is about making smart choices and better companies. It can be a real win-win,” Willem Appelo, former Worldwide Vice President Supply Chain, Strategy, Innovation and Deployment, Johnson & Johnson told Ernst & Young.

February 2021 webcast participants also shared their biggest challenges related to executing an asset-light strategy, with 31% saying finding the right partner is the biggest challenge, 27% saying structuring the deal or partnership, and 25% saying aligning internal stakeholders.

Companies that embark on this journey with strategic partners should prepare for how to manage barriers. Key considerations include the following:

Scoping and evaluation
– Evaluate all products and services, businesses and capabilities, and geographies — nothing should be considered sacred.

– Build and monitor the joint business case with various scenarios, covering multiple years and several iterations of proposed “transfers.”

– Properly weigh benefits (e.g., cash release, return on assets improvement and reduced complexity) with operational challenges and risks (e.g., quality, disconnect with customer and brand image).

Deal structuring and enablement
– Determine carve-out considerations for the seller and stand-alone integration activities for the buyer to allow for a smooth transition.

– Prepare required opinions, operating manuals, documentation and commercial legal agreements to activate the new inter-company operating model.

– Consider go-forward transition service agreements, take-or-pay arrangements and intangible asset valuations as part of divestitures.

Tax and accounting
– Consider the operating model impact in asset-light environments from a tax (direct and indirect) perspective, including value-added tax, payroll registration, income tax and customs, global asset sales and currency impacts, preserve and extend tax rates, etc.

– Evaluate the financial impacts of the deal to avoid surprises on go-forward reporting, including cash flows and accounting considerations for both the buyer and seller.

– Structure asset sales in a tax-efficient manner. Consider the degree to which the continued dependencies in the operating model (e.g., outsourced manufacturing) create “control” from a tax perspective with the associated requirements of arms-length transfer pricing.

Collaboration and governance model
– Collaborate early with your asset-light partner on the future state operating model and governance with a common vision (e.g., greater speed-to-market, overall costs reduction).

– Clearly define the partner pricing mechanism and method for tracking value levers — both quantitative and qualitative to avoid long-term price arbitrage.

– Avoid unnecessary or redundant oversight, controls and incremental costs.

Uncomfortable conversation
Asset-light business models are expected to be increasingly adopted by companies across the value chain well beyond the current Covid-19 crisis. This is in response to an increasing need for innovation, maintaining liquidity, and building more agile and resilient operating models.

When all partners in an ecosystem work together to create customer value – with capabilities aligned to better or best owners – it creates a winning value proposition for all participants. Companies that proactively seek out opportunities can benefit from a first mover’s advantage and, ultimately, create a competitive differentiation to outperform their peers.

BRPs and turnaround professionals may find that having these conversations with their clients may become very uncomfortable. However, they are unavoidable.

Your main objective is to help your client avoid financial distress. If this means having an uncomfortable conversation, you may have to evaluate your clients’ circumstances and realise that it is a situation where short-term pain can turn into long term gain. This is a high value conversation. 

Robin Nicholson is a Director at Corporate-911 and is a Senior Business Rescue Practitioner