CFO insights:
Legal entity simplification:
Cleaning house for a turning economy
With a nascent economic recovery underway in the United
States and many parts of Europe, renewing growth is
moving up on the CFO agenda. Nevertheless, in many
industries, there is a concern that despite an overall
economic recovery, demand will grow sluggishly for a
considerable period of time. The recent recession has also
enhanced the role of finance as a source of competitive
advantage. At a time when US Treasury and LIBOR rates
are very low, companies with cash on hand and strong
balance sheets are able to raise capital at much lower
costs than those with poor balance sheets. This creates
opportunities for new growth through M&A — many
companies are already turning on their M&A engines.
Nevertheless, despite signs of recovery, CFOs still have
to keep an eye on cost controls. One area to consider as
M&A engines are fired up is business legal entity simplifi-
cation. In many companies, prior mergers and acquisitions
have created overly complex and misaligned organiza-
tional structures. New mergers are only likely to add to
this complexity. In a potentially lean recovery, it remains
important to sustain focus on cost controls. Legal entity
simplification can be a critical precursor to generating and
potentially sustaining significant cost savings from M&A. It
can make M&A more effective through streamlining pro-
cesses, improving strategy execution, aligning people, and
supporting economies of scale in M&A investments.
Why should you consider legal entity
simplification?
In the last decade, many companies grew through
acquisition. With resources focused on closing the deal,
many acquirers may not have developed a legal entity
structure that integrates the two companies and supports
or aligns with the organization’s overall operating model.
At other times, complex legal structures were designed in
part to respond to the prevailing tax regime. However,
as the tax regimes change from those of prior conditions,
the prevailing legal and operating structures may no
longer yield their intended value. This can lead to
cumbersome organizational structures, the inefficient
use of resources, and value erosion through a variety of
different ways, such as:
1. Costly and cumbersome financial statement and tax
preparation and filing
2. Excessive and inconsistent risk and data management
processes and systems
3. The erosion of employee morale and difficulties
in retaining talent due to bureaucratic rules and
unnecessary complexity
4. Tax inefficiencies and higher overall tax rates
Tapping the Value of Legal Entity Simplification
Legal entity simplification can help CFOs generate value
through:
Managing Legal and Regulatory Compliance Costs
Entity simplification can potentially reduce legal and
compliance costs. These may include costs associated with
preparing and filing regulatory disclosures, duplicative
licensing and permitting, records maintenance, and other
similar costs. In addition to direct costs, there can be sig-
nificant time savings for staff and senior executives. These
savings can include the time of boards of directors who
have to attend the annual meetings of these separate enti-
ties and respond to other statutory formalities. In addition,
there can often be savings opportunities associated with
the elimination and consolidation of registered agents in
applicable jurisdictions.
 Gaining operational efficiencies
If business simplification extends beyond legal simplifica-
tion to improving processes and operations, there can
also be significant cost savings opportunities. Savings can
arise from eliminating duplicative administrative services
and their consolidation to national or transnational shared
service structures to capture economies of scale. Costs
related to intercompany transactions (e.g., work orders,
retitling of property, fleet sharing, subleases, etc.) can also
be eliminated. Vendor rationalization across legal entities
and jurisdictions can also drive savings. For example, con-
solidating duplicative insurance policies and eliminating
duplicative premiums can often result in savings.
Another area for savings from operational consolidation
comes from improving basic human resource processes.
Consolidation allows substantial savings in managing vari-
ous compliance processes, payroll and payroll tax compli-
ance, benefits such as 401(k) plans, and insurance plans.
Furthermore, the time and costs required to maintain
intercompany agreements and the time and costs associ-
ated with creating a structure for labor contracts can have
the potential to come down.
Figure 1. Potential Areas for Cost Savings from Entity Simplification
Labor unions,
Legal filings/
HR, payrolls
obligations
Customer/client
obligations
Management
reporting
Statutory
audits
External fiancial
reporting
Global tax Legal entity
(Direct & Indirect) structure
Organization
wide
Managing Tax Compliance Costs and Updating
Tax Profile
Not surprisingly, the simplification of legal entity structures
can reduce costs associated with the preparation and filing
of U.S. federal, state and local, payroll, and even non-U.S.
tax returns. In addition to these and other costs, and
process enhancements, entity simplification offers busi-
nesses the opportunity to update antiquated tax structures
and mitigate unnecessary organizational risk in terms of
transfer pricing and accounting for intercompany transac-
tions. This often results in reduced organizational risk,
and automation to replace manual processes. Streamlined
tax processes may also yield intangible benefits, such as
increased tax departmental capacity to focus on higher
value planning activities, higher employee morale, and
reduced turnover.
Given that Legal Entity Structure drives a variety of costs,
there are many potential savings from simplification.
Figure 1 illustrates areas impacted by legal entity structure
that could give rise to cost savings from simplification.
Third party
contractual
obligations Treasury/creditor
covenants
Inter-company
accounting
Cashflow/debt
covenants
Regulatory/indus-
try obligations
Workforce
mobility
What is in it for the Finance Organization?
Legal entity simplification can also impact the finance
organization, allowing for opportunities to transform the
finance organization and operations to manage costs. This
frees up resources for higher value added finance activi-
ties. Consider the following opportunities:
Treasury and FPA Opportunities
Simplification reduces the resources required for cash
budgeting and forecasting. In treasury it saves and re-
duces bank account service fees and transaction charges
(e.g., accounts maintenance, cash sweeps, and inter-
est charges). Similarly, the time and cost of monitoring
covenants (e.g., maintaining ratios, monitoring thin cap,
meeting minimum cash requirements, etc.) also goes
down, as does the time required to maintain intercom-
pany positions. Eliminating minimum deposit requirements
in multiple jurisdictions can also result in more efficient
cash management.
Accounting Opportunities
Simplification also saves the time required to compile
and reconcile month- and year-end legal entity financial
reports. It reduces the time and cost related to sepa-
rate entity statutory audits that require entity-specific
materiality and audit procedures. It also has the potential
to produce savings in the time required to roll forward
and reconcile intercompany account balances; the time
required to prepare and post intercompany journal entries;
the time required to reconcile legal entity books including
posting, adjusting, and eliminating journal entries; and the
time related to IFRS implementation readiness.
Information Technology Opportunities
Simplification reduces the time required to input and
update general ledger legal entity coding, and saves by
reducing the costs of system reconfiguration. This can also
bring down the costs associated and the time required to
draft, process, and maintain reports across entities. Having
a more standard set of data definitions and systems across
entities can also improve the data quality in the organiza-
tion, and permits stakeholders to work off the same data
sets.
For all the above reasons legal entity simplification can
help the finance function. For a CFO, simplification
potentially provides an added benefit of greater visibility,
risk management, and control over the company’s various
operations.
So What Should CFOs do?
The first thing to consider is if the current legal structure
is too complex. Has it outlived its usefulness, and can the
company benefit from simplification? If so what areas are
best to simplify?
To address the problem of a misaligned legal entity
structure, we recommend an iterative approach involving
key inter-departmental stakeholder participation to refine
the operating model and legal entity structure. Initially,
collaborating with the general counsel’s office and the VP
of tax is an effective way to identify the quick wins from
potentially changing the legal structure. The next step is
to socialize the benefits of legal entity simplification and
develop or validate a shared vision of an operating model
with broader group of organizational stakeholders. This in
turn can be used to drive a multi-stage strategy toward a
more simplified legal entity structure. Given the compa-
nies often have many legal entities and separate opera-
tions to integrate, we find a multi-wave, iterative planning
and simplification approach can be effective to improve
the organization.
Primary contacts
Russ Hamilton
Partner
Deloitte Tax LLP
ruhamilton@deloitte.com

Chris N. Kontaridis
Senior Manager, Post-Merger Integration
Deloitte Tax LLP
ckontaridis@deloitte.com

Trevear Thomas
Principal
Deloitte Consulting LLP
trethomas@deloitte.com

Acknowledgement
We thank Ajit Kambil, global research director, CFO
Program, for his contribution and Ameya Nagarajan of
Deloitte Research for her editorial assistance.

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