What is entity rationalisation?

Colourful wooden shapes displaying the concept of entity rationalisation.

The global COVID-19 pandemic has created a number of challenges and opportunities for UK companies.

Yet as those changes have continued to unfold over recent years, it’s become increasingly clear to many business owners that the company structures they preside over aren’t optimised to harness those new opportunities.

This is where entity rationalisation comes to the rescue. But before you dive in and start rearranging your corporate structure, it’s important to understand the entity rationalisation process and why it’s important.

This guide explains what entity rationalisation is, the benefits it generates, and how the process works.

What is entity rationalisation?

Entity rationalisation is a process a company undertakes to review its legal structure. Because entity rationalisation focuses on a company’s legal structure, you’ll also often hear people call it “legal entity rationalisation”.

Entity rationalisation is used to decide whether a company’s current legal structure and its entities are necessary. From there, the company’s team will then use this analysis to determine how efficiencies or savings could be generated by simplifying the company’s structure.

This potentially includes eliminating less efficient or unsustainable legal entities.

What are the benefits of entity rationalisation?

Because legal entity rationalisation centres on slashing inefficiencies, it enables companies to improve profitability.

Rationalisation is all about aligning current operations with core business strategy. By eliminating redundancies and wasteful spending, companies can generally expect rationalisation to produce enhanced financial results.

Places for cost reduction include intercompany transactions and tax inefficiencies. But a lot of savings stem from a reduction in administrative costs. When you simplify a corporate structure and shed unwanted entities, you can reduce your accounting, human resource, IT, compliance, and auditing liabilities.

But on a more proactive level, legal entity rationalisation helps companies better understand their risk profiles. That makes things a lot easier regarding strategic alignment — hopefully helping you to achieve long-term, sustainable growth.

How does entity rationalisation work?

If you feel it’s time to reconsider your corporate structure, entity rationalisation is relatively simple in terms of theory. But to be successful, that process must be well-planned and thoroughly executed.

The first step is to appoint a team — either internal or external — responsible for carrying out the process.

Next, your team must build an up-to-date chart documenting your company’s current structure. This should include every legal entity your business owns and necessary details about those entities like purpose, type, and location.

Be warned: this step can be tricky if your business has recently been involved in a merger or new acquisition.

After this chart has been created, the team must establish the purpose for each entity and challenge that purpose. If the entity’s purpose makes sense, it should be kept. If the pros and cons don’t weigh up, tag it for elimination.

From there, your team must create a new chart optimising structure based on what you’ve tagged for elimination or reassignment. Once approved, an execution plan can be put into place that’ll turn the new structure into a reality.

That plan must include an in-depth project plan, timeline, and budget which minimises disruption and engages stakeholders to ensure seamless buy-in and execution.

Finally, to be successful you must also establish an evaluation process that can be utilised to gauge whether the anticipated savings were ultimately realised by your executed plan.

If executed well, entity rationalisation enables you to shed dead weight and move forward with enhanced agility and sustainability. You’ve just got to ensure you closely monitor the process — and if you’re struggling, don’t be afraid to ask for professional insight or assistance.

Want to learn more about UK companies and corporate structure?

Check out the Linnear COSEC knowledge centre to ensure your business stays in the know on the latest industry news. You can also get in touch to find out how our company secretarial services can drastically reduce your costs and free up your time to help you focus on running your business.

About the author

Nicholas joined in 2018 to set up the Company Secretarial Department in the group’s company formation divisions. After establishing the department, he was a key stakeholder in the development of Linnear CoSec. Prior to joining the group, Nicholas worked in a variety of client-facing positions at an international provider of corporate services, caring for a diverse portfolio of companies. He is a Chartered Secretary and Governance Professional, and holds a bachelor's degree in Politics as well as a Masters in Corporate Governance.

Leave a comment

Your email address will not be published. All fields required