Corporate divestiture, more famously known as corporate carve-out, is frequently associated with a failing business. It means selling a business within a business that is not a complete standalone business unit and doesn't have its own reporting, independent management team, or even an advisory board.
However, selling a business unit doesn't mean that it's a failure. On the contrary, failure is when you are selling a business that is already in duress. In this article, we will discuss how to plan a divestiture effectively to make it more valuable and successful with Larry Forman, Senior Manager at Deloitte, and Michael Frankel, SVP, Managing Director at Deliotte.
"You can never really start too soon to prepare a business for sale" - Larry Forman
The most important thing that you could do to avoid these types of failures, is to be self-aware. You should continually assess your business if you want to grow it, sell it, or harvest it for cash. Early detection of any potential asset to be divested allows you to plan effectively to make the business more attractive.
Here are the things that you need to plan for to make your business more valuable:
Leadership and employees are one of the most important parts of a business. You need to identify the group of people that you are willing to send with the divested business that will make the deal appealing to the buyer. If you want until the business is declining, your top talents will run away, and then you have nothing to show to the buyer if that happens.
It is crucial to understand that the management team will ultimately help sell the business. The management team can leave anytime they want, and you can't force them to join the acquiring company. If you can't get their cooperation, then it will not be a very successful sale.
One of the things you can do is provide incentives to the management team and the sale process. You can also convince them that they are better off with the acquiring company and a better future for them there. If you want to go a step further, you can incentivize the buyer to incentivize the management team.
"The due diligence that you perform on your business should be as rigorous as the due diligence that the buyer's going to perform." - Larry Forman
A significant portion of your company's value is in your intellectual property, your technology, data, and content. You need to educate yourself about your own business and avoid any surprises during the diligence process. Anything the buyer will discover, that you did not know about or did not declare upfront will drive the price down. The more comfortable the buyer is about your business, the higher the price will be.
Speaking of comfort, TSAs are another thing you need to plan for to appease the buyers.
Part of the whole point of having a large organization is the synergies you get by sharing resources, capability, and people. It becomes a problem when you are selling that business unit. You need to figure out what transition services you are willing to offer to the buyer that they will be interested in. Having a thoughtful position of what they need will increase their comfort, willingness to do the deal, and the ability to pay.
"If the terms of a deal are made clear upfront prior to a bid, a buyer is less likely to try to renegotiate them" - Michael Frankel
Also, you need to be upfront about any specific stipulations that you may want to have after the deal. For instance, you sold them software that you actually want to keep using after the deal; you need to state that in the contract. Stating that after the negotiations will give the power to the buyer and can drive the price down.
The same goes for non-competes. The buyer might be expecting that after they have bought your business, they will have exclusive rights to your customers. You need to state that upfront if you are still looking to do business with your existing customers.
Exploring the buyer's options for growth can make the asset more attractive to the buyer. A lot of times, a business unit within an organization is designed for the parent company. However, there could be many opportunities for that particular business that the parent company just refused to expand to. This can potentially increase the purchase price if you can present them with a pro formal financial model of what the business could look like.
A failed divestiture is insanely damaging to the company because of its impact on the employees and the customers. Doing it right is absolutely critical. Preparing early on helps mitigate this risk, and by following the tips mentioned above, you can increase the likelihood of a sale, together with the purchase price.