Corporate divestment: How to transfer company car fleets between owners
Managers could be excused for considering the transfer of cars from one part of the business to a new company a simple formality, which is no more difficult than just “transferring the lease.” If only! Yes, the lease needs transferring, but this is by no means straightforward and in some cases can be downright difficult.
Securing credit
One of the most challenging parts of the process is working with the divested business to secure credit with, what will become, their new suppliers.
Even though a newly divested business can be born of good stock, it is still considered a new business in the eyes of the supply chain and therefore needs a credit rating to get the credit. And when you are talking about maybe 200 cars, at say £30k a car, that’s a lot of credit: £6m/year to be exact.
Lets demonstrate the process via two fictional businesses. The existing business, lets call them IT Wizards, is divesting part of their business to new owners, lets call them IT Witches.
IT Wizards need to get rid of the company car liability for the 200 cars that are going to IT Witches under TUPE. They need to push this through as the liability will remain with them until a lease transfer can take place - the suppliers have a contract of supply and are getting paid, so they don’t care who pays it.
IT Wizards start the process of contacting all the suppliers to transfer the lease to IT Witches. Because the companies are pan-European, this is necessary in 12 countries and across many different suppliers.
Guarantee as an alternative
Now, back to the credit rating. Quite simply, as IT Witches is a new business, with no trading history, many suppliers may be reluctant to extend credit. Challenging! So credit isn’t really an option for the countries with a larger operation. The next option is guarantee. This can take a number of forms and can be provided by:
1) Existing business - so, to contextualise this - this option is for the existing business to provide hefty financial guarantees for a business that they no longer want to be involved with. Exactly. Not much of an option.
2) The Bank of new the business - this is actually the gold standard and is preferred by the supplier. However not only do bank charges make them expensive, the reluctance of the banks to deviate from standard contract language makes them quite inflexible and cumbersome.
Because of this it is not uncommon for the guarantee language to be rejected by the supplier, starting a negotiation process of what is acceptable wording for each party; all the while adding to the time and resource allocated to the project.
3) Parent of new business - depending on the structure of the new business this may be an option. However in some cases the new backers are VCs and providing a guarantee like this is not what they signed up to.
So, getting a suitable guarantee is far from straightforward. It involves much to-ing and fro-ing between suppliers, clients, banks, lenders etc and no one solution becomes the norm across the business. Local differences and fleet structure play large roles in determining who supplies the guarantee and it is pretty much a bespoke solution for each country.
The use of deposits
Where guarantees are actually unavailable, either the local bank is reluctant or unable, or the existing business feel it was a step too far, the next option is for the new business to offer deposits.
As this exercise is all about new business, and new businesses need cash, having to release some of that trading cash as a deposit is not ideal. However it is sometimes the only option that is now available to get the business operational and get boots on the ground.
Depending on the requirements of the local market and the size of the operation in that country, the process can be long and complicated. The appointment of experts can help shield the companies from the pain as best as possible but a transfer of this nature does need careful planning and a fierce degree of control.
So, although managers may think that the lease can be “just transferred” it is strongly suggested they read this and be politely requested to reconsider their opinion!
This article was provided by Fleetworx.
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