By Michael Lovell
Typically, businesses have a life cycle and transition through phases, from initial launch through maturity. The coronavirus has impacted the economy in such a manner that even industries that have traditionally been resilient to economic duress have had to react to stay afloat. But, just as a business maturing through the various phases of the traditional life cycle adapt, those effected by COVID-19 can adapt to unlock capital or create shareholder value through strategic transactions. One type of strategic transaction is a divestiture.
According to a survey by Deloitte & Touche, divestitures accounted for up to 40 percent of transactions during the financial crisis of 2008–2009 as companies looked to generate capital for future growth. Divesting non-core assets allows a business to take that capital and use it to fund either day-to-day operations or future investments in core businesses. Forms of divestitures include the sale, spinoff, or split-off of a business, or even an initial public offering.
These divestiture forms are complex transactions that require significant consideration, valuation, and documentation. Knowing where to start is critical to an efficient and successful transaction and preparation is key, which makes consulting a professional in the field a crucial first step. Being equipped with an understanding of the particulars of the divestiture process will help a business communicate its needs and objectives around what will define success for the transaction. It will also increase the comfort level of those involved in what can be a stressful and even emotional event. And while the general divestiture process is quite consistent, there are nuances of the process that will be unique to each business. The following are some core aspects of the process and related considerations a seller must address:
- Define the perimeter of a sale – A seller must be prepared to answer the question, “What are you selling?” and in some ways to think like a buyer. Considerations include whether the business is the product that you’re actually selling, the hard assets, and the human aspect – the people involved. The examination becomes more complex when you start to think about human capital, leadership, working capital, long-term contracts, intellectual property, or even IT. All of which makes it important, early on, to define the perimeter of a sale and make sure it’s being communicated to the buyers.
- Be on the same page – Everybody “in the room” and a part of selling and executing the transaction should know about the transaction and understand the goals and what the business is trying to get out of it. Having the right people in the know involved from the start will make for a faster and smoother process as exclusion can fester into dissension and differences of opinion that risk people making individual decisions and disrupting the transaction down the line.
- Preparing the financials – This should begin well before announcing and marketing a sale. When preparing the financial information for the transaction, do so with a wide range of buyers in mind. The type and number of potential buyers will be impacted by the presentation of the target’s financials. Consider a portfolio approach with “sales packages” that will attract strategic buyers or private equity firms in different industries and locations. Additional work may be necessary if records are limited in detail, as a buyer who doesn’t get all the answers they seek may raise their level of risk and lower the price they are willing to pay. Other factors include the timeframe and relevance of the financial data and whether a business has comingled operations that will need to be identified and isolated as part of the divestiture process.
The divestiture of a business may require the preparation of either consolidated or combined financial statements, depending on the structure of the transaction, the parties involved, and, if applicable, associated capital raising activities. When the net assets and results of operations of a business are carved out of a larger entity, the resulting financial statements are referred to as “carve-out” financial statements. Some consider this the most difficult step in the sales process which may involve capturing internally allocated costs and any overhead that may have been carried outside the target’s financials.
- Be flexible – A virtue that applies to the entire process. In the beginning, from developing the road map which captures all the associated activities, teams, and functions affected, to shifting to a shared services model and finally to full separation, management must accept that a divestiture is a fluid process that can take 12 to 18 months, from concept to separation. Today’s challenges will look different by the time a deal is completed. Even in well-managed separations, there may be market shifts or other industry-specific factors that may prompt a slowdown in the process.
Divestiture is a tool that companies can use on the acquisition and divesture side to drive growth and improve cost control – both things companies need to become better. It all begins by taking a step back to understand the company’s current state and then building a sound bridge towards the desired future state.
Through our hands-on approach, ABIP serves as a fiduciary that provides clients with exceptional transactional advisory services to facilitate a successful and profitable sale. Our advisory team brings decades of cumulative experience performing advisory services and leading companies through opportunities and challenges as they arise.
ABIP Transaction & Technical Advisory Services has the experience to provide swift, strategic, and technical support across a number of areas, including:
- Transaction management and due diligence
- Business valuation
- Restructuring and turnaround
- Bank and private equity reporting
- Quality of earnings
- Financial forecasting
- Working capital and cash flow analysis
- Interim CFO and management reporting services
- Technical accounting and reporting
- Forensic accounting and financial risk assessment
To better understand how we operate and how we can help you with your needs, give us a call at (713) 954-2002.