A Strategic Approach to Divestitures

The art of selling off business units may never have the glamour that surrounds mergers and acquisitions, but it's just as vital to a company's ability to consistently create value, and should be the focus of just as much leadership attention and strategic planning. That rarely happens, though. Too often, divestitures are not much more than an undignified scramble to jettison underperforming assets.

Companies that fail to think strategically about divestitures stand to lose significantly in today's marketplace, according to a report from Ernst & Young LLP's Transaction Advisory Services. The study proposes a set of guiding principles for enhancing sell-side capabilities:

• Know what you're selling. Companies should conduct thorough and regular portfolio reviews and separation analyses to determine the value of their businesses to potential buyers. Valuation models should encompass costs that are often overlooked, such as the cost of restructuring the business in advance of the sale, and transaction services agreements (TSAs), which provide temporary back-office support after the deal is closed.

• Act, don't react. Divestitures usually take longer than acquisitions, and longer than sellers expect. That gives buyers more time to discover problems and drive down the price. Organizations should establish formal, ongoing sell-side review processes so that divestitures don't devolve into fire sales.

• Dig for hidden gems. Once an asset has been targeted for sale, it's time to perform all the due diligence processes that a buyer would likely perform, such as quantifying potential synergies and investigating potential tax issues. Just as it's the buyer's job to bring up hidden problems, it's the seller's job to point out unrecognized values. Providing robust, stand-alone financial statements can help sellers build credibility.

• Speak up. Effective communication with all stakeholders is critical to the success of the divestiture. Employees of the unit that's to be spun off need to understand the rationale for the deal and the potential career benefits of working for a new owner that values the business more. Consider providing incentive and retention packages, especially for the leadership team.

• Be ready for day one. Divestitures proceed through four major periods: pre-signing, before a buyer has been identified; pre-closing, when the sale has not yet been finalized; stabilization, when the spin-off is almost independent but still relies on its former parent; and independence, which occurs after the termination of TSAs. Each stage presents its own challenges, but TSAs are particulary tricky to set up, and sellers should begin designing them as soon as they have identified a potential buyer. Finance integration is a complex and time-consuming area, too, and companies should set aside plenty of time to coordinate this with the buyer.

• Measure for future success. Set goals at the beginning of the transaction process and review them at regular intervals. You might want to set up a basic dashboard that tracks the progress of key activities or teams. It's worth making the effort to evaluate the divestiture process itself as well as its end results. Doing so might turn up some best practices that will be useful in future deals.

To read the complete report from Ernst & Young, click here.