The image source is Pexels.
Special purpose vehicles (SPV) are separate legal entities created to isolate and securitize assets in a separate entity from the parent company. Its main aim is to mitigate the financial risks companies face when they want to diversify their venture or raise capital. Here are various benefits of using SPV.
It Protects the Parent’s Company Assets
Assets are vital for business functioning, and losing them to creditors can jeopardize business operations. When you hold your business’s high-value assets under the special purpose vehicle, you separate them from business operations. Since you don’t enter the assets in an SPV on your primary company’s balance sheet, they aren’t susceptible to lawsuits.
It Isolates Financial Risks
Whenever you want to invest in a large and high task project, SPV management services will enable you to explore such ventures without putting your entire business at risk should anything go wrong. Remember that the SPV has a separate legal identity, and even if the parent company goes into liquidation, SPV will remain safe.
You can isolate a project risk and share it with investors. You can have some investors put their money into the project, while others will stay out of it to reduce risks in a single entity. This is particularly important when handling projects like building big stadiums or office blocks.
It Enables Easy Assets Transfer
Most high-value assets are challenging to sell. You will need to obtain a high level of permits to complete the process, and the requirement may vary from state to state. The main reason why the government requires that you acquire a seller’s permit is to collect sales tax on transactions.
If you find the permit processing relatively time-consuming, you can create an SPV for your assets to make a self-contained package that you can quickly dispose of. You sell the entire SPV as part of the merge and acquisition process should you need to transfer the assets.
It Holds the Company’s Property
You can choose to create an SPV to hold your business property. This is particularly important in cases when the property on sale attracts higher taxes than capital gain. In such a case, you will only have to sell the SPV rather than the property. After the sale, you can now pay the tax on the capital gain, which is far much better than the property sales tax.
It Attracts Investors
SPVs will help you attract more favorable financing. Your company can raise funds to finance new ventures or acquisitions without necessarily increasing the debt load for your parent company. Investors and lenders will only look at the assets in the SPV rather than the entire company.
You can even use assets in the SPV to raise additional capital and get financing at a reasonable rate. This is because the credit quality of the parent company can’t affect the SPV. You, therefore, have a chance to invest in more significant projects without financially draining your firm.
SPV Can Protect Your Intellectual Property
Creating SPV can help protect your business’s vulnerable intellectual property. For example, if you don’t wish to expose your new technologies or inventions to competitors, you can create an SPV and maintain the secrecy of such intellectual property. Also, if your business has some licensing agreement, you can create an SPV to own the IP and isolate them from any previous deals.
It Helps in Investment Protection
You can use the SPV to test the market if you want to venture into an investment rather than risk your parent firm. This is particularly beneficial if you’re going to invest in financial markets which are very vulnerable. You will gain a better understanding of the expected results from your investment. If you gain early returns, then you can push the idea forward.
Test marketing will also give you some insights to help you rethink your idea. You will know the nature of the competitive situation, the trends, and demand to reduce the risks of failure. If the venture doesn’t seem favorable, you can develop better ways to mitigate the risk or even drop the investment.
For most companies, the biggest challenge is to mitigate the risks involved in business, acquire enough finances to fund their projects, and access sufficient liquidity. Fortunately, the SPV is a vital tool that will help you meet these goals.