How To Plan a Divestiture From an Accounting Perspective

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So for whatever strategic reason, you want to sell a part of your business, not as easy as it sounds. In case you didn’t know, selling a part of your business is one of the hardest deals you can do. You have to make a lot of considerations, which we will be talking about in this article—helping us how to plan a divestiture from an accounting perspective is Neal McNamara, Co-founder of Virtas Partners, an advisory firm specializing in preparing companies financially and operationally for M&A.

“The cardinal sin in a sell-side process is taking something to market with numbers that haven’t been vetted by somebody like me.” - Neal McNamara

Deal perimeter

The very first step in planning a divestiture is identifying your deal perimeter. You have to clearly define what you are selling, what is included, and what’s not. This will define the financial data structure that you need to prepare to make the sale. 

Types of Exits

The complexity of the financial data varies depending on what type of exit you are doing. You can do a carve-out divestiture or a spin-off divestiture. Both approaches are incredibly complex and could take a very long time to finish. 

When you are doing a carve-out, you are essentially preparing to market a business that has never been apart from the parent company. Therefore, you will have to build a standalone financial statement without any historical financial information. 

On the other hand, spin-offs are where you are carving out a part of your business and spinning it off to a new standalone and separate business. It is essentially an IPO where you will issue existing shareholders new shares in exchange for their corresponding shares of the parent company. This process is even more complicated and could take years as it will most likely involve the SEC because publicly traded companies usually do spin-offs.

Auditing

The second step is to prepare your financials. Financial auditing is a vital part of any M&A transaction. One of the most important things to remember is that financial statements are not a good basis for a divestiture. It’s usually done for a different purpose, and when it comes to divestiture, it has to be prepared to make sure that whoever buys the company understands their true value. What you need is a Quality of Earnings report. 

Quality of Earnings

Quality of Earnings is usually done for three purposes. The first is to reduce surprises that you will encounter when the buyers come in and perform their due diligence. It will open your eyes to what to expect, especially on pricing.

The second reason is to have more credibility with the buyers when they’re analyzing your business. And third is to reduce the timeline of the buy-side due diligence. In theory, if you do all the work that the buy-side team would be doing, then they don't have to. But if you aim for credibility and a faster deal approach, you need to perform a very detailed targeted procedure in making the QoEs; otherwise, it will just get thrown out, and you will only have wasted time.  

This is why hiring management consultants is vital when you are going to market and sell your company. You have to have an unbiased, third-person perspective looking into your financial history and prepare it properly for sale. There are also many adjustments to be made in your financial data because sell-side diligence will require a different approach from your annual financial statements. And make sure they have access to all your financial data to avoid discrepancies and surprises, which is the primary reason you hired them in the first place.

Conclusion

Divestitures is one of the hardest deals you can do and you need to be fully prepared for it. Avoid surprises by doing internal audits properly so you know what to expect and you can get the best value for your asset.