Business growth comes in many different forms. When we think of growth, we most logically think of adding things on – building a business through organic growth, acquisition or merger. But in fact, divestment is also a legitimate, in many cases necessary, and much-pursued route to growth. Practised well, it can be extremely fruitful, but getting it right isn’t easy and there are many potential pitfalls. A business that’s serious about getting divestment right has to take a strategic, well-judged approach.
Understand where the value lies
One of the most important aspects of getting a divestment strategy right is to understand where the business value in your business. Those boards which focus solely on current bottom line performance without understanding the key levers that drive it may be doing the business a disservice in the longer term. Every board would do well to take a more balanced look at assets and performance.
Are any current assets or business units worth more to someone else than they are contributing to your overall value? If such assets exist, they might be good candidates for sale. Similarly, underperforming assets can be identified and analysed, for example for investment for growth, or for sale. Holding on to a part of the business might be stifling its development – and might harm not only that part of the business but the wider organisation as well.
Consider, for example, a business that has a unique and very desirable technological capability that has been developed in part through the efforts of an internal consulting team and which is now no longer crucial to the core offering. It could have wider uses that would generate new revenue streams. Would it make sense to spin the consulting arm out as a separate business, using their knowledge to sell access to the technology? Would losing what is effectively a cost centre and gaining licensees to your processes be beneficial?
The portfolio approach
Central to understanding the role of assets within the business, and to making decisions about divestment, is viewing the business as a portfolio of assets each of which (ideally) generate revenue, profit and a return for shareholders. The largest companies typically view themselves in this way, rather than as organisations which primarily exist to make, trade or sell something.
Seen through the prism of an assets portfolio, particular things which are made or sold might be let go fairly readily. A pharma company might sell a product, manufacturing site or research arm, or a mining company might sell a concern in a particular territory, without affecting or altering the core business aim of maximising shareholder value, and with the added benefit of freeing up capital to grow or improve other assets.
To make this approach work, taking an objective view is critical. There is no room for the view that ‘we started out doing x, so we should continue to do it’. Rather, the driver is maximising profitability, and taking action on those parts of the business which under-perform relative to the rest of your organisation.
Certain types of companies are particularly skilled at taking this view of themselves. Those in the oil and gas, pharma, and mining sectors are good examples. Such companies continually examine their assets and might buy or sell as their needs and the external environment dictates. One of the purest comparators is private equity, whose only usual mode of operation is to buy and sell entities within a portfolio to maximise overall value.
Be strategic, not reactive
Every particular sale is different. It takes place in different market circumstances. If money needs to be raised quickly, approaching a potential buyer to make a quick sale or responding to an approach from a potential buyer might be what’s needed, even if it raises less money than a more measured, competitive approach would. But even in these cases, the decision to sell should be a strategic one. Divestment without understanding its part in an overall business strategy could be the road to ruin.
Successful companies will almost inevitably receive opportunistic approaches from others wanting to acquire particular assets. But that only happens if the approaching company sees value in what they want to acquire. If they can see value, perhaps others see it too. Competition can have the inevitable consequence of an uplift in sale price, so it always advisable to get rival bidders in the room.
Selling following an approach might be a sensible option following a full review of the particular asset’s place in the company portfolio, but so might holding off and taking a more considered view, spending time analysing what it is that the prospective buyer wants, and working through how they plan to maximise value from their purchase. Perhaps they are looking at a part of the company that’s been ignored, but that does have huge potential. Perhaps their approach is a wake-up call to invest in that part and use it more wisely. Perhaps a little more investment today with a clear objective to sell later will reap a greater sale price tomorrow.
Understand the buyer’s motivations
When considering the sale of any asset, it is key to stand in the shoes of a prospective buyer to discover the value they see in your asset, learn how more value can be added so the sale price can be raised, and therefore identify who out there might be the ideal purchasers. Indeed, identifying the ideal prospective purchasers is a great way to maximise sale price – after all, those who want the asset the most will be most inclined to pay handsomely for it.
A business that understands all of its assets well will have a clear strategy that identifies potential assets for sale in the medium and long-term, and plugs its thoughts about potential purchasers into this forward plan. It will have a work plan for developing those assets to ensure it gets the maximum value from them, and will have an idea of the key characteristics of who might want to buy those assets.
For example, decoupling a business arm from the organisational back end (finance, HR and so on), so that it can be sold as a stand-alone entity which can turn a profit from day one might be of great interest to a private equity company, whereas an entity without these functions is likely to be more attractive to a larger firm that would plan to integrate the entity into its own back-office without the cost and hassle of redundancies, office closures etc.
Another example – would your divestment (such as a product or technology) really take off if combined with another capability or asset (such as a well-recognised brand or global distribution channels)? If so, look for buyers who fit the ideal profile, and use your thinking about their potential deal benefits to extract the best terms for the deal.
Don’t forget about the people
It tends to be the people that make a business succeed or fail. Their commitment, technical knowledge, years of understanding of how a business works or deep relationships with customers can all be vital. In the case of a business built on intellectual capacity or intellectual property, such as tech or pharma companies, the people arguably comprise the bulk of the underlying business value.
Regardless of whether a public or private sale is being contemplated, word will get out. People want security, and when they learn of a potential sale, they may feel nervous and decide it is time to move to pastures new. Your best people will likely find it easiest to leave. If too many key people decide to go, the value of the asset is diminished, and it is possible a deal could fall through or only be able to be completed at a lower price.
This is a problem the seller has to face head-on. Given that the seller’s primary aim is to maximise the value that a sale generates, it is their responsibility to do everything they can to retain the value that people represent during the sale process and to be mindful that the sale is not a purely technical process.
Divestment is a perfectly legitimate route to company growth, but to realise its true value it must be part of a comprehensive, long-term and objective growth strategy in which the company’s assets are viewed as a part of a portfolio, and their contributions to current and potential future value fully understood. Would you sell your house to a passer-by for the first price they offer? Likely not. You would take advice, consider the best likely type of buyer, invest to fix key issues, consider the price of similar houses nearby, understand the effect of the sale on your finances both short and long-term, and make a measured decision. Similar approaches taken to divestment will ensure you maximise deal price, leading to a healthier long-term business.