4 minute read 11 Sep 2020
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How Legal Entity Rationalization could generate immediate cash savings

Authors
Torsdon Poon

EY Americas International Tax and Transaction Services Integration Leader

Tax advisor with more than 25 years of experience in transactions. Advises corporate clients on national merger and acquisition tax matters across a wide range of sectors and industries.

Chris Nelson

EY Americas Tax Attributes and Planning Leader, International Tax and Transaction Services

Tax advisor in the areas of mergers and acquisitions, consolidated tax returns, internal restructuring, legal entity rationalizations and general corporate taxation.

Denise Guarino

EY Americas Legal Entity Rationalization Leader and Ernst & Young LLP International Tax Principal

Leader in helping to create value for Fortune 50 companies by reducing costs to align structures with business objectives. Philanthropist. Avid traveler.

4 minute read 11 Sep 2020
Related topics Tax planning

EY LER leaders answer questions about what LER entails and its benefits, including how it may capture savings for many organizations.

Three questions to ask

  • What is LER?
  • What are the key opportune times to deploy LER?
  • How has COVID-19 affected LER execution?

Most organizations can significantly benefit from Legal Entity Rationalization (LER) at any stage in the business life cycle. Yet, the scope of what LER entails and how it may capture cash savings remain ambiguous and elusive to many organizations. Given the state of the global economy in 2020 and the global growth outlook beyond, we sat down with EY LER leaders Denise Guarino, Torsdon Poon and Chris Nelson to get their seasoned perspectives on LER and how exactly it could generate immediate much-needed cash savings.

To start, how would you define LER?

Denise: In a nutshell, I would define LER as the process of optimizing a business legal entity structure to properly align to an organization’s strategy and vision for the future. In practice, this means examining a company’s organizational structure, discussing with key stakeholders the elements of their functions and business units as it pertains to the organizational structure, and proposing a solution for the reconfiguration of the legal entities that make up the structure.

Torsdon: I would just add that LER needs to balance the competing priorities among the different functional areas of an organization, and the goal is to design a structure that is nimble to accommodate the anticipated and unanticipated organizational needs in the future.

What are examples of potential benefits of LER?

Chris: For most companies, LER results in significant cost reduction. It also can result in shoring up balance sheets from liquidity and credit perspectives. For example, I’ve seen this occur where certain entities have minimum working capital requirements and, through the consolidation of those entities, were able to free up that cash for other purposes in the organization. Moreover, rationalization makes organizations nimble for business combinations/separations and often “pays for itself” via incorporating afforded tax planning opportunities.

For most companies, LER results in significant cost reduction.
Chris Nelson
Principal, International Tax and Transaction Services

Denise: LER also creates efficient business organizations by virtue of streamlining processes and locating inherent operational synergies. The byproduct of this, that most companies are interested in and need at this time, is typically significant operational cost reduction from both a hard cost perspective as well as freeing up resources to focus on revenue-generating activities.

Cost reduction seems to be a core LER benefit. Where in the business organization do these costs originate?

Torsdon: There are a number of hard costs and soft costs that can result from LER. Examples of quantifiable costs include legal, tax, financial and regulatory filing obligations, eliminating duplicative functions, maintaining minimum working capital requirements, fees — such as bank account fees, software licensing fees, data warehousing fees, insurance premiums, legal directors’ fees and translation fees, etc. — as well as the resources required to fulfill all these obligations.

Chris: I would add that softer costs could include inefficiencies and risks created by an unrefined and outdated legal entity structure, intellectual property and IT systems usage. By refining and updating legal entity structures, LER inherently eliminates these costs.

What are the key opportune times to deploy LER across a business organization?

Chris: At any point when a business organization is holding a large number of legal entities, LER should definitely be deployed to reduce the myriad of costs that are associated with that structure. Now, even more so, a large legal entity structure may hinder growth or exacerbate the financial challenges many companies may be facing. For that reason, LER is used as a tool to assist in business simplification or transformation. For example, as market conditions continue to put increasingly more pressure on supply chains, LER is a necessary solution to identify the legal entities that cause delays and friction in the efficient flow of goods and services.

What is a common misconception about LER?

Denise: A common misconception is that LER is only focused on eliminating dormant legal entities, which is not the case. While it is true that a thorough examination of a structure will generally identify quick wins via the elimination of dormant entities, such as through an ERP (enterprise resource planning) system implementation, LER is more so focused on holistically streamlining an organizational structure and will often identify legal entities that serve no stand-alone purpose, the rationalization of which will provide operational synergies.

How has COVID-19 impacted LER execution?

Torsdon: LER continues to be an important tool for businesses to preserve margin and headcount as revenues across a multitude of industries are impacted by COVID-19. It’s one of those tools that business leaders may prefer to utilize to manage costs without sacrificing the quality of products, services or critical business investments. LER execution is also compatible with the new remote work culture resulting from COVID-19, as most necessary information is obtained in a virtual environment. For example, LER may be performed with a mix of short interviews (that may be virtual) and questionnaires, as appropriate, to gather the relevant information. We also review publicly available corporate registry data and readily available tax, legal and financial data to assist in our analysis.

Summary

The scope of Legal Entity Rationalization and how it may capture cash savings remain ambiguous and elusive for some, but most organizations can significantly benefit from it at any stage in the business life cycle.

About this article

Authors
Torsdon Poon

EY Americas International Tax and Transaction Services Integration Leader

Tax advisor with more than 25 years of experience in transactions. Advises corporate clients on national merger and acquisition tax matters across a wide range of sectors and industries.

Chris Nelson

EY Americas Tax Attributes and Planning Leader, International Tax and Transaction Services

Tax advisor in the areas of mergers and acquisitions, consolidated tax returns, internal restructuring, legal entity rationalizations and general corporate taxation.

Denise Guarino

EY Americas Legal Entity Rationalization Leader and Ernst & Young LLP International Tax Principal

Leader in helping to create value for Fortune 50 companies by reducing costs to align structures with business objectives. Philanthropist. Avid traveler.

Related topics Tax planning