The act of
selling a part of a business, whether you call it a spin-off, a
demerger, or a divestiture, is fundamentally different from – but not
quite opposite of – acquiring or merging with another
business. The main difference is obviously that a business is
being sold rather than bought – well, from the seller’s perspective
anyway. In fact, a high percentage of acquisitions result
from buying a piece of a business that has been split off from another
business. Just like a share of stock on the NYSE, each
transaction has two sides, a buyer and a seller, the two of which have
different opinions of the value of that stock or business at a
particular time. A business is an asset that, like shares of
stock, appreciates or depreciates in value with time depending on how
well its assets, liabilities, and operations are managed. The
seller might think that the cash garnered from the sale of a business
should be worth more than the present value of the company plus the
present value of future cash flows, but the buyer obviously
disagrees.
Divestitures and acquisitions are similar in that they are often
different sides of the same transaction, and they are both strategies
that companies use to maximize shareholder value.
Divestitures have a lower profile than acquisitions because often lower
performing parts of a company are sold off so there isn’t the hoopla
around the deal. Both acquisitions and divestitures are
complex procedures, and executives often underestimate the necessary
steps required for a successful business change of such
caliber. Mergers & acquisitions are relatively better
understood and prepared for than divestitures, but the recent reports
of a possible economic recession have companies switching gears and
taking advantage of the capital and streamlined operations provided by
the latter. The key question becomes, “Is it the right time
to sell my business?” The answer is a complex one, but there
are some fundamental steps that should be taken to make sure you
maximize the value of your business if you do decide to sell it.
A recent KPMG International survey of more than 400 mergers &
acquisitions professionals indicated that almost half of corporate
sellers and roughly 25% of private equity firms thought that they had
failed to maximize the value of their latest sale.
1
When asked what the causes of lost value might have been,
almost 70% of both corporate sellers and private equity firms, the
largest response of any category, cited loss of control over the
disposal time frame as a catalyst to value loss,
2
indicating that the act of managing the time requirements of a
divestiture and the resulting companies is an often overlooked or
undervalued piece of the equation.
It would be nice if there were an instruction manual for how to
effectively divest, but the simple fact is that it does not
exist. You will be able to find a handful of publications
that boast some helpful hints that consist of “key questions to ask in
a divestiture”
3 or
“What to Disclose
and What to Keep Private During Divestiture”, but unlike acquisitions,
selling a part of a business is not something that companies do on a
regular basis, so there are few, if any formal
methodologies. For many companies, a divestiture is
something that is done only once. Specialized teams work on
their part of the sale – the lawyers and investment bankers work on the
sales agreement, the accountants work on the financials, and the IT
people work on the systems. There are few post-divestiture
consulting practices, only a few people who have checklists and the
skills to manage all the cross-functional activities, and other than
the GAAP accounting rules, few industry standards. Many
employees do not even hear that their part of business is to be sold
until after the paperwork is complete.
In order to add value, companies need to prepare for a divestiture and
develop a strategy for continually evaluating those parts of the
business that would make good acquisition targets. Selling
part of the business can add operating cash, narrow the focus, and
provide direction to the remaining part of the business. The
parts of the business that are being sold have the opportunity to
create a new company, to develop a new and different culture from the
parent company, and to grow without some of the burdens of the parent
company.
A successful divestiture strategy has several components:
1.
Prepare Early. Determine the value of each area
of the business. Evaluate the strengths and weaknesses so
that you can capitalize on the strengths that will provide the greatest
value to a prospective buyer. Begin to prepare a “due
diligence” package for each part of the company – whether it is a
product line, a region, a department, or a legal entity. The
due diligence package should include the following:
a. Mission
statement - Why you are doing what you are doing and how
does that tie into a long-term vision for the entity?
b.
Value proposition – What are the benefits, value, and
ROI? Why would someone pay for this part of the
business? What are the current assets of the business?
c.
Product or Service – What are you selling? How
are you pricing it?
d.
Marketing and Sales Strategy – Who is your
market? How do you reach them? Who are your current
customers? Why do they buy from you? Who are your
competitors?
e. Operations
and Operating Assumptions – length of sales cycle, sales
per month, revenue per sale, accounts receivable timing, major
suppliers, headcount
f.
Financial Projections – Develop a 5 year plan.
g. Management
Team – If you sell this part of the business, who will
lead the charge? Do you have an experienced team in place
that can develop a strategy and execute toward that strategy?
2.
Create a Transition Team. The transition team
will work with the lawyers, accountants, bankers, IT team, and HR team
to develop a plan and deliverables for the divestiture. Speed
and momentum are important. The sooner the entities are
operating separately, the quicker the returns.
a. The divested entity may need to
operate on its own for a period of time. That means that the
entity needs to have its own systems in place, its own benefits
packages, beginning balances for the financials, facilities, and an
infrastructure to support operations.
b. Service contracts, leases, lines of
credit, supplier contracts, license agreements and employment
agreements need to be renegotiated.
c. A communication strategy needs to be
developed – both internally and externally. You don’t want
your best employees to leave because of job uncertainty or because
management is distracted.
d. Systems need to be separated – who
gets what data? What data is needed to run each of the
businesses? How are open transactions treated? What
data is confidential? How will you treat history?
(Please visit
this page for more
information on divestiture software.)
e. All the assets need to be divided:
fixed assets, financial assets, and intellectual property.
3.
Focus on Core Processes – Revenue growth adds value and
creates positive dynamics both internally and externally that can help
retain customers and talented staff.
a. Give priority to customer-facing
processes – sales, support, order management.
b. Design processes to present a
consistent face to the customer before and after the split.
c. Create and staff interim processes to
sustain the quality of products and services through the transition.
4.
Remember it’s not over when the sale is complete.
Each of the two resulting companies, the parent and the divested
entity, must be carefully managed from the moment of initial
divestiture until both companies achieve independent
stability. Members of each company must continue to work
together to minimize disturbances to both the parent and divested
companies in order to ensure that operations continue without
interruption and are able to capitalize on the creativity and
excitement of building new businesses.
Divestitures are clearly not simple tasks, but a survey that targeted
senior executives at Fortune 500 and FTSE 350 companies revealed that
67% of the CEOs and corporate development officers polled believe that
we will see an onslaught of divestitures in the next twelve months.
4
This may or may not result from perceptions of a falling
economic climate in the United States, but it is clear that
divestitures may be a great alternative to mergers &
acquisitions for increasing capital, streamlining operations, and
focusing an organization’s efforts. By subtracting, both the
parent company and the divested entity can add value and improve
performance.
