A demerger is a type of corporate restructuring, where a company separates part of its business into a different entity. There could be a number of reasons for this transaction.

The most common reason cited is to create additional value for shareholders by splitting out certain activities that may perform better if separated from the main business.

A well-known rule of thumb is ‘as much as a willing buyer is prepared to pay for, and a willing seller is prepared to sell for‘. Valuing a private business is not an exact science. Many factors can determine business value. These include cash flow, sustainable profit, asset value, financial history, location, competition, customer base, industry standards, growth potential, ongoing management, and the general state of the economy.

There are a variety of business valuation techniques (such as discounted cash flow to the multiple of earning method) to employ here and care should be considered on which is the most suitable.

Yes, as long as the company’s articles of association do not restrict or prohibit it from doing so. There should be a written contract (or, if it is not in writing, a written memorandum of its main terms). An appropriate shareholders’ resolution will likely need to be passed.

Once a share buy-back has taken place and capital treatment has been applied, the company is required to make a return of information to HMRC within 60 days. This must give details of the payment and the reasons for treating the transaction as capital rather than a distribution.

Companies House also needs to be notified of the transaction within 28 days.